A procedure or technique used to determine the value of a business.

Under each of the three broad approaches to small business valuation, there are a number of procedures, called business valuation methods, which you can use to calculate the business value.

The methods under each business valuation approach rely upon the same set of key assumptions. However, the procedural and mathematical details of each business valuation method may differ considerably.

Asset-based business valuation methods

Sometimes referred to as the cost-based methods, these business valuation methods estimate the value of a business as the sum total of the costs required to create another business of equal economic utility.

Asset based business valuation methods are useful for accurate business purchase price allocation, an important element of structuring a business acquisition deal.

A classical asset based business valuation method is Capitalized Excess Earnings, also known as the Treasury Method. In addition to business value calculation this method lets you determine the value of business goodwill.

Income-based business valuation methods

The income methods, as the name implies, determine the business value based on its earning power and risk.

The main business valuation techniques used by these methods are capitalization and discounting. Business risk is captured in the form of discount and capitalization rates.

The well-known capitalization method is Multiple of Discretionary Earnings. The Discounted Cash Flow business valuation method is the most common way of determining business value by discounting its income.

Market-based business valuation methods

These methods help you estimate the subject business value by comparison to the recent selling prices of similar businesses.

Such business value comparisons can be an effective way of showing what the business is worth. For private companies, the sales of similar privately owned businesses offer the most compelling source of market comparables.

Valuation Formulas derived from such private business sales comps are a standard way to determine the business fair market value.

Use of multiple methods in business appraisals

Using a number of business valuation methods is highly recommended for accurate determination of business value.

To conclude what a business is worth, you can take the results of several business valuation methods into account. This process is often referred to as business value synthesis.

Tools for Business Valuation