Business Valuation is the process of determining the economic value of a business or company. Business valuation can be used to determine the fair value of a business for a variety of reasons
Business Valuation is the process of determining the economic value of a business or company. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership and divorce proceedings.
Business Valuation Description
There are a variety of business valuation techniques used for determining a fair price for a business. These include:
- Asset based approaches - this technique values the business based on asset minus liability estimation. This can be done with the business as a going concern where the balance sheet is used for the basis of estimate, or a liquidation approach which estimates the net cash proceeds from liquidating the business.
- Earning value approaches - this technique involves estimating expected cash flow from past earnings records, then multiplying the cash flow by a capitalization factor. The capitalization factor reflects what rate of return would be expected by a reasonable purchaser.
- Discounted future earnings - this technique involves use of predicted future earnings (rather than past earnings) divided by a capitalization factor.
Business Valuation Interpretation
There is a truism in the venture capital industry that "the value of a company is only what someone is willing to pay for it." In other words, in the end, the market - and your ability to attract investors and negotiate with them - will determine the value or selling price.