There are three fundamental “approaches” to measure the value of a business enterprise:
- Asset approach
- Market approach
- Income approach
Asset Approach
The asset approach to business valuation considers the underlying business assets in order to estimate the value of the overall business enterprise. This approach relies upon the economic principle of substitution and seeks to estimate the costs of re-creating a business of equal economic utility, i.e. a business that can produce the same economic results, or Return-on-Investment (ROI), for its owners as the subject business. Business Valuation Cochise County AZ
MARKEt Approach
Under the Market Approach to business valuation, one consults the market place for indications of business value. Most commonly, sales of similar businesses are studied to collect comparative evidence that can be used to estimate the value of the subject business. This approach uses the economic principle of competition which seeks to estimate the value of a business in comparison to similar businesses whose value has been recently established by the market.
INCOME Approach
The Income Approach to business valuation uses the economic principle of expectation to determine the value of a business. To do so, one estimates the future returns the business owners can expect to receive from the subject business. These returns are then matched against the risk associated with receiving them fully and on time. The returns are estimated as either a single value or a stream of income expected to be received by the business owners in the future. The risk is then quantified by means of the so-called capitalization or discount rates.
METHODS
Under each approach, a number of “methods” are available which can be used to determine the value of a business enterprise. Additionally, each business valuation method uses a specific “procedure” to calculate the business value.
No single business valuation approach or method is definitive. Hence, it is common practice to consider multiple business valuation methods under each approach. The business value then is determined by reconciling the results obtained from the selected methods. Frequently, a weight is assigned to the result of each business valuation method. If so, the sum of the weighted results is used to conclude the value of the subject business.
This process of concluding the business value is referred to as the business value “synthesis.” Finally, based on the analyst’s ( i.e. valuator, appraiser) professional interpretation of the synthesis, the conclusion of value is rendered.
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