What is Business Valuation?

Business Valuation Methods

The three most common valuation methods used are:

• The earnings value (or income) approach. This approach centers around the main purpose of operating a business: to make money. This can be carried out in two ways: discounted future earnings method or capitalized past earnings. The discounted future earnings are based on the average prediction of future earnings and then divided by the discount rate of expected return based on the risk of the company. Alternatively, the Capitalized past earnings method focuses on the expected income for the future based on the company’s past earnings. That income is then multiplied by the capitalization factor.
• Assets-based approach. The assets-based approach is relatively straightforward. It is the process of adding up assets of the business and then deducting any liabilities.
• Market value. The market value approach can be a more intricate method of valuing a business, as it relies on examining the value of businesses similar to yours in your area. For example, the value of a bakery may be determined by looking at the revenue of other bakeries within a 50 miles radius and identifying the similarities and differences compared to the bakery that is being valuated. Depending on the market turnover of similar businesses in the area, this method may not be a viable option.

Contact Us Today to Learn Why Business Valuation is Important

Prosper Financial believes that an accurate business valuation is an essential part of planning for the future of your business. To learn more about this process, reach out to us today.