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Business valuation methods: what's best for your business?

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When it comes to putting a value on your business, there are generally three common approaches to make that assessment. By knowing the differences between them as well as their pros and cons, you can determine which method best applies to your business. Use the following information as a guide to help you value your business enterprise. If you still have questions, you can discuss them with your qualified business broker who can help you navigate the entire valuation process.

Valuation
A valuation is the process to determine what a business is worth. This information is, of course, important for business owners who are want to grow or even sell their business. It's important for buyers of businesses too. A smart valuation needs to be accurate, and many business owners seek the council of third parties who can objectively help determine the worth of a business.

Income Valuation
The income method of valuing a business focuses on assessing the money aspects of the business. How much money does the business make? Assessing the value of the business by examining the income is important to determine its economic potential. This method also takes a look at the financial risks associated with the business. Assessment models employ discount or capitalization rates to determine a fair market value for the business. While it is important to examine a business in terms of its money-making potential, this view can be limited, which is why many people opt for other methods of valuation as well.

Asset Valuation
The asset approach to valuation examines the business assets and liabilities to help determine worth. Simply speaking, calculating the value of the assets minus the cost of the liabilities results in number that relates to the worth of the enterprise. This approach views the business as the sum of its parts. The drawback to this method is that it often leads to a valuation that is less than the fair market value. There are some assets, for instance, that get left out of the equation because they are intangible. Therefore, it's important for business owners to include all assets--high quality management, for example--and make them part of the assessment equation to achieve a reliable valuation.

Market Valuation
The market valuation method is informed by market considerations like business competition. For instance, what is the going rate for similar businesses that are currently being sold in the marketplace? This information influences the value of the business in question. Of course, this real-time information is important to know, but this type of valuation also shifts from time to time based on the activity of the marketplace.

If you are concerned about valuing your business, your broker may be able to recommend some tips to help you assess your business's worth. A simple consultation will help you determine which method you should use to value your business. Moreover, it can be helpful to work with an outside party to effectively assess the various aspects of the business.

Sources Used:

ValuAdder, “Business Valuation: the Three Approaches”, http://www.valuadder.com/valuationguide/business-valuation-three-approaches.html

SunBelt Bay Area, “Business Valuation”, http://www.sunbeltbayarea.net/sellers/business_valuation.php

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