Generally accepted ways of determining the value of small businesses and professional practices. All businesses should have updated valuations. It assists in getting capital, sale of the business, corporation structuring, divorce, buy sell agreements, partnerships, and mergers and in Estate planning. All businesses should have a valuation within a three year bubble.
What It Means:
There are three broad approaches used for small business valuation. Each approach serves as a foundation for a group of methods used to determine the business value.
The Income approach methods determine the value of a business based on its ability to generate desired economic benefit for the owners. The key objective of the income based methods is to determine the business value as a function of the economic benefit.
The economic benefit, such as cash flow is capitalized, discounted or multiplied to perform the valuation. Key to the effective use of the income-based valuation is the proper way to go depending on the multiples.
Asset approach to valuing a business
The Asset approach methods seek to determine the business value based on the value of its assets. The idea is to determine the business value based on the fair market value of its assets less its liabilities. Most commonly used valuation method used by the CPA.
Market-based business valuation
The Market approach based valuation methods establish the business value in comparison to historic sales involving similar businesses. Under the market approach that is typically used in professional business appraisals, include methods that rely on the so-called pricing multiples, which determine a relationship between the business economic performance, such as its revenues or profits, and its potential selling price.
Sales of businesses which closely resemble the business being valued are most commonly used to estimate the pricing multiples. Statistical analysis of such actual business sale data is needed to establish the business valuation.
You need to look at a comparison of the different business valuation methods to make the right choice for you and your business.