With all the choices of methods you have for business valuation the question is: which of the methods is the most accurate. In truth, the accuracy of your business appraisal depends mostly on your specific situation and the set of assumptions you make.
In fact, the selection of business methods varies on the case by case basis. As an example, let’s say you are valuing a restaurant. These types of businesses are plentiful and often sell. As a result, there are enough comparable business sales to check against. So valuing an established restaurant based on market comparables makes sense.
But what if you are valuing a technology company that is a pioneer in the industry? Chances are there are few if any companies that offer the same or even similar set of products or services. Businesses in such an emerging market segment do not sell often until they prove themselves and become well established. Here the market comparables may not exist. You are likely to fall back on the income or asset based business valuation methods.
Still other companies may be unique in some ways compared to their competitors. A company that has established itself as a leader in its market over a long period of time may have considerable customer following. The issue of business goodwill may become very important in such a case. To handle the valuation properly, you could choose the capitalized excess earnings valuation method to calculate the value of business goodwill.
Some businesses distinguish themselves by being cash cows. They produce very stable earnings year after year. Capitalization of income valuation methods are likely to produce very accurate results when valuing such companies.
How about a start-up? A young company may be full of promise but has yet to show its true colors when it comes to winning a large customer base and turning a profit. Its value may be tied up in its long-term potential. Forecasting future business earnings, estimating the risk and coming up with an accurate idea of business value may lead you to a different choice like the discounted cash flow method.
As you can see, accuracy of any business valuation method depends on what you are valuing. Consider what the company has to offer, what its value creating potential is, and how it sets itself apart from the competition. Make the right assumptions, such as a well thought out earnings forecast and risk assessment, and the methods you choose will likely produce an accurate, defensible result.
Take a look at how the various business valuation methods work: