Different Ways of Valuing a Company
Determining the value of a company is essential when planning for major business decisions. Understanding your business’s value enables you to identify the next best steps to achieve your business goals. However, there are several different ways of valuing a company. Each method offers a unique perspective on its financial health, operational strength, and market potential.
In this article, we discuss the most common methods of valuing a business and how to determine the most suitable method. For the most accurate valuation, it is best to work with a certified business appraiser.
As a professional business appraiser, Peak Business Valuation values small businesses throughout the United States. We are happy to help you with a timely and accurate business valuation! In addition, we can address any questions you may have on the different methods of valuing a company. Get started today by scheduling your free consultation below!
Understanding Professional Business Valuations
During a professional business valuation, a certified appraiser analyzes a company’s growth opportunities, risk factors, financial performance, and market trends. This thorough assessment helps the valuation expert provide an objective estimate of the company’s fair market value.
There are many reasons to obtain a professional business valuation. Some common use cases include preparing for mergers and acquisitions, exit planning, financial reporting, navigating litigation, and securing financing. Business owners can use the insights gained from a valuation to make informed decisions.
Common Methods of Valuing a Business
The business appraisal process involves a variety of standardized valuation methods. There are several common methods, such as the discounted cash flow method, the capitalized earnings method, the book value method, etc… However, each method falls under one of three main valuation approaches: the market approach, the income approach, and the asset approach. To determine the most applicable approach, valuation experts consider factors like the size of the business, industry trends, and financial performance. In many cases, a combination of approaches is applied to ensure the most accurate estimate.
Below, we highlight the three primary business valuation approaches. For more information, check out Common Business Valuation Approaches.
The Market Approach
The market approach is most effective when reliable market data is available. It compares the business to similar companies that have recently been sold. Valuation experts compare sales data and use valuation multiples to get an accurate estimate of the business’s fair market value. At Peak Business Valuation, we typically apply valuation multiples derived from SDE, EBITDA, and revenue when utilizing the market approach. See Valuation Multiples for a Small Business to learn more.
The Income Approach
Next, the income approach measures a business’s value based on its future earning potential. Projecting future cash flows requires a thorough assessment of historical revenue trends and expenses. The business appraiser then applies an income-based valuation method to determine the present value of future earnings.
There are two primary methods under the income approach: the capitalization of earnings method and the discounted cash flow (DCF) method. The capitalization of earnings method is best for small businesses with stable earnings histories. When using this method, a capitalization rate is applied to the projections to reflect risk and expected returns.
On the other hand, the discounted cash flow method is ideal for businesses with fluctuating or high-growth earnings. This method projects future cash flows over several years and discounts them to reflect their present value. It is important to note that the discounted cash flow method is less common since it relies on uncertain projections.
The Asset Approach
This approach determines a business’s net worth by calculating the value of its tangible and intangible assets and subtracting liabilities. The asset approach is common for businesses that rely heavily on machinery, equipment, and other assets.
Under the asset approach, a valuation analyst typically adjusts the book value of assets to reflect their fair market value. While this method does not account for a business’s earnings potential, it provides a floor value that can be useful in various situations. To learn more, see The Asset Approach Made Simple.
At Peak Business Valuation, we have extensive experience with a range of different valuation methods. We are here to help you with a reliable business valuation. We can also address any questions you may have on how to value a small business. You can schedule your free consultation with Peak Business Valuation by clicking the button below!
Determining The Best Way to Value a Company
Since every business is unique, the valuation process is not always the same. The best way to value a company depends on various factors, including the purpose of the valuation, the company’s size and industry, its financial performance, and the availability of market data. For example, a technology company with high growth potential may benefit from an income approach, while an established manufacturing business may be best valued using market multiples or the asset approach.
As part of a business valuation, valuation analysts consider the strengths and limitations of each approach. They also consider specific risk factors, such as customer concentration, workforce strength, and market position. Considering these elements helps the valuation expert provide a tailored valuation that reflects the company’s true value. If you have any questions about the different ways of valuing a company, Peak Business Valuation is happy to help! Reach out today to schedule your free consultation.
Conclusion
Understanding the different ways of valuing a company can help you make strategic decisions when buying, selling, or growing the business. There are three main valuation approaches: the market, income, and asset approaches. Each analysis uses different metrics and methods to provide a data-backed estimate of the company’s value. To determine the best way to value a company, consider obtaining a professional business valuation.
Peak Business Valuation is a reputable business appraiser that regularly uses a range of valuation methods. We are here to help you with a timely and credible business valuation. Additionally, we can answer any questions you may have about valuing a business. Start today by scheduling your free consultation below!
Read How to Value a Small Business for additional insights.
