3 Main Business Valuation Methods for Accurate Assessment
It is critical to implement the right business valuation formula to ensure the best and accurate valuation of your business. For that purpose, you need to hire a financial or business analyst who is adept at incorporating various business valuation methods.
There are several formulas or methods to do an accurate valuation of your business. Identifying the most suitable method for the best outcomes needs both skill and experience.
Ideally, you can determine the value of your business in three ways, which we can call the business valuation methods. They are:
- Asset Business Valuation Formula
- Income Business Valuation Formula
- Market Business Valuation Formula
Each of these formulas provides you with a different perspective on the valuation of a business. To determine the worth of a business accurately, you can apply the following methods:
1. Asset Business Valuation Formula
The asset valuation method allows you to calculate a company’s worth considering the values of its assets and liabilities. The primary asset valuation methods are:
▪ Asset Accumulation Method
▪ Capitalized Excess Earnings Method
The asset accumulation method comprises a set of adjustments that will allow you to make the book values of business assets and liabilities.
On the other hand, the Capitalized excess earnings method applies several business valuation formulas to determine the value of a business as the summation of its tangible assets as well as goodwill.
2. Income Business Valuation Formula
The income business valuation formula provides a way to figure out the worth of a business taking into account the company’s earning potential and risks. The income valuation method has two main types:
▪ Discounting methods
▪ Capitalization methods
To apply the discounting method, first, you need to specify a projected income stream of a business. The current monetary value of the business is then calculated using the discounting valuation formula. One of the variances of this method is the discounted cash flow.
In the capitalization formula, you need to divide business income with the capitalization rate. You can also achieve the same by applying an earnings multiplier.
3. Market Business Valuation Formula
The market business formula is one of the major business valuation methods that typically applies several valuation multiples. These multiples are actually ratios that connect the business market value to some of the metrics of an organization’s economic performance.
You can derive the valuation of multiple formulas from the sales data of similar businesses to calculate the value of a business quickly. Remember that this formula considers the actual selling prices of similar businesses.
Learn Business Valuation Methods!
Applying business valuation methods accurately takes proper training, skills, and experience. Besides, you need to be careful of avoiding the common mistakes that people commit during calculations. For example, you have to be careful about valuation multiples, as you cannot use them without the major adjustments for marketability, size, and business ownership interest.
You can learn these nuances of business valuation formulas by enrolling in a quality online Valuation Analyst Skills Training (VAST) program at affordable fees. You can study at your own pace through video content, hands-on projects, and excellent mentor support.
Summary: It is critical to implement the right business valuation formula to ensure the best and accurate valuation of your business. For that purpose, you need to hire a financial or business analyst who is adept at incorporating various business valuation methods. There are several formulas or methods to do an accurate valuation of your business. Identifying the most suitable method for the best outcomes needs both skill and experience. Applying business valuation methods accurately takes proper training, skills, and experience.
