ValuAdder Business Valuation Blog

Take a look at a typical professional business appraisal report. You will see that a number of valuation methods are used to establish business value. In fact, all business appraisal standards, e.g. USPAP and AICPA SSVS No 1, require that you use all three approaches whenever possible. If you do not, you need to explain why your valuation has omitted one or more approaches from consideration.

A sensible business person can ask: what is the best method to use in business appraisal? Often, the market comparables offer the most supportable evidence of business value. However, the question is how comparable your subject company is to other, similar businesses? Apples and oranges comparisons do happen.

The asset approach is very helpful as long as no significant technological or economic changes have been at play in the market. In addition, business assets should be easy to evaluate as to their physical condition and residual value. Let’s say the equipment or software the business uses have been leapfrogged by new advances in technology. Old machinery or out of date software applications may not be worth much in such cases, so applying the asset approach methods could lead to erroneous valuations.

The income approach methods let you put on an investor’s hat. The biggest challenge is the need to forecast the future financial results for the business. No one has the crystal ball, and your valuation using such methods as the discounted cash flow is only as good as your earnings projections. The assumptions you make drive the results.

Regardless of the valuation methods you choose, business appraisal is an expression of opinion. If your valuation engenders trust, your readers are likely to rely on the answers. When in doubt, consider a second opinion. A different pair of eyes may offer a different view of the business and what creates business value.