Business Valuations

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There are three main approaches to business valuation:

the income, market, and asset approaches. Choosing

which approach is best depends on the type of business

being valued, and many times, multiple approaches are

used to come to a final opinion of value. Every approach

has advantages and disadvantages.

Income Approach

This is the preferred approach used for business

valuation. It is based on calculating what the future

cash flow to the owner of the business is worth today,

also called the “present value”, or the “discounted cash flow”.

Market Approach

The market approach is the most common approach in

valuation. The best evidence of the value of a business is

the market, or what other similar businesses have sold for

(think of the MLS® system for residential real estate). The

market approach uses multiples (to adjust for size) to

determine the value of a business.

Asset Approach

The asset approach looks at the value of the business

in terms of the market value of its assets only. To

accurately determine the value of the assets an

appraiser may need to be hired. For most service-

based businesses, the assets (furniture, fixtures, and

equipment) are small, but other types of businesses

like a manufacturing company may have substantial

assets. Note that the value of real estate and

buildings is usually excluded from the value of the

operating entity.