Valuing a business is a very complex task, which usually requires a professional which holds certain designations such as ABV (Accredited in Business Valuation) or ASA (American Society of Appraisers). The professional appraisers are skilled in identifying relevant information for the particular business and applying the appropriate valuation methods. Relevant information generally includes quantitative data, such as financial statements and business tax returns.
There are three generally accepted valuation methods:
- The market approach estimates the business value by comparing the subject business to a similar one that has been recently sold.
- The income approach estimates the value of the business by converting expected economic benefits, such as profits or cash flows into a value. This can be based on historical information regarding past and current profits.
- The asset approach is based on the values of the assets and liabilities of the business. These assets include both tangible and intangible assets.
The appraiser will also select the appropriate valuation method based on the type of business and the availability of relevant information. While all valuation methods should be considered, not all will necessarily be used in determining value.