Common Methods of Valuing a Business
For more traditional businesses, these are the more common methods of valuing a business:
Market-Based Valuation: Calculates business’ value based on the recent purchases and sales of comparable businesses within the same industry.
Asset-Based Valuations: Calculates the net value of a business’ assets, both tangible and intangible, less the value of its liabilities.
Discounted Cash Flow: Shows the present value of a business’ future cash flow, discounted according to the risk involved in purchasing the business.
Capitalization of Earnings: Shows a business’ future profitability, accounting for cash flow, yearly return on investment, and expected value. This method extends calculations for a single period into the future.
A valuation represents your business’ total worth. For each of the abovementioned methods, there are specified formulas of calculating them, taking into account business assets, revenue, nature of industry, and any debt or losses.
It can be common that multiple valuation methods are used for valuing one business, it is important to choose the correct methods otherwise the valuation figure will be skewed or inaccurate.
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