Business valuation is the process of determining the economic value of a business. It provides the owners with an objective estimate of the value of their company.
Usually, a #BusinessValuation takes place when an owner is looking to sell all or a part of their business, or merge with another company. There may also be some other reasons like if you need debt or equity to expand your business, or if you need a more thorough tax analysis or if you plan to add shareholders. Through business valuation process the owner of the business gets to know the current worth of their business by analysing all aspects of the business, including the company’s management, capital structure, future earnings and the market value of its assets.
The process of business valuation has three approaches to it. First is the asset based approach then earning value approach and the final one is market value approach.
Asset Based Approach
An asset-based approach totals up all of the #investments in the company to determine the value of the business. Under this all your investment is computed in either of the two ways-
A going concern asset-based approach, also known as book value, will review your company’s balance sheet, list the business’ total assets and subtract its total liabilities.
Whereas a liquidation asset-based approach is used when determining the liquidation value or net cash value of your business if all your assets were sold and liabilities paid off.
Earning value approach
An earning value-based approach is generally based on the idea that a business’s value relies on its ability to produce profits/ wealth in future. There are two types of earning value approaches-Capitalizing past earnings and discounted future earnings.
Market value approach
A market value approach to a business valuation is for establishing the value of your business by comparing your company with other similar companies in the market which has been sold recently.
Usually the Earning value approaches is a common means of business valuations, but it may not necessarily be the right choice for your business. You may consider using the combination of all these methods in order to get a fair and accurate value for your company. However the best way to get proper valuation is to hire an experienced business valuator who will advise you on the best methods of how to evaluate your business.
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