Three Approaches to Valuing Your Business
There are three approaches that business valuations use, and this video provides a brief overview of each approach and how to use it.
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Certified Business Valuators utilize three approaches when valuing your business. Depending on your specific company, the valuation analyst may use one, two, or even all three approaches. Tune in to hear a brief overview of each approach and how it may be applicable to your valuation.
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Hi, I’m Sheila Darby, a managing director here at BizWorth. Thank you for joining me for this series on how to value a business, covering the three approaches on how to value your business.
There are three generally accepted valuation approaches to valuing any business. The first is the asset approach. The second is the income approach. And the third is the market approach. We’re going to cover each one of these approaches in more detail following this introduction video, that goes into more depth. This is just an introduction to introduce each of the approaches to you.
As a certified valuation professional, we have to consider all three of these approaches for each valuation engagement. Depending on the circumstances and the reason for the engagement, we determine whether one, two or all three of the approaches are appropriate for your particular business.
First, when do you want to use the asset approach and how do you use it? Well, when do you want to use it? There are some examples of when the asset approach is normally very insightful, and that’s for holding companies or investment companies. It’s also for companies close to liquidation or considering liquidation. For companies that have generated losses for one or two or three years in the past, generally, the asset approach is helpful as well. It’s also great for real estate. Real estate rich companies that have lots of valuable real estate sitting on the balance sheet. How do you use this approach? Well, like a mechanic that has lots of different toolboxes and there’s different tools in each of the toolboxes, each one of these approaches are toolboxes for valuation professionals. We have different tools or different valuation methods in each one of these approaches. So, the two methods that we’re going to cover (there are more methods) for the asset approach is the book value method and the adjusted net assets method.
Next, is the income approach. When do you want to consider the income approach? Well, we’re always going to consider the income approach, but it’s particularly insightful for companies that are profitable and that are generating earnings and cash flows. There are lots of methods under this particular approach, but the two methods that we’re going to cover in the video detailing on the income approach is the capitalization of earnings method and also the discounted cash flow method(also known as the discounted earnings method or the DCF).
Next, is the market approach. There are lots of different pros and cons to the market approach, but generally speaking, the market approach is great to use for companies because it’s easy to explain and easy to calculate. On the flip side, sometimes it’s very hard to find good transactional information. Oftentimes the valuation company needs to have access to good databases with transactions and often this comes at a steep subscription price. Also, the quality of the information that’s reported. All of this information is reported to these databases & subscriptions companies from the brokers or from the banker. So, the information is only as good as the information that’s been collected from these sources. The list of the pros and cons can go on and on. How do we use it? There are multiple different methods that we’re going to cover in the market approach in more detail.
Generally speaking, those are the three approaches: the asset, the income and the market approach. Please follow us and watch the other videos that are going to come out on these approaches. In the meantime, if this introduction has been helpful, then I do hope you watch the other the other videos. We have one on the asset, two on the income and another on the market approach.
I hope this video blog was helpful. Please reach out if you have any questions. If you go to our web site, www.BizWorth.com, you can schedule an appointment to meet with me or one of our advisors to talk about your business valuation. Even if you’re not sure it’s the right time for a business valuation, hop on a free consultation and let’s talk through that. We’re always happy to help business owners so feel free to reach out. If you like our content and would like to see more, visit our blog or follow us on Facebook, LinkedIn, and YouTube. Thanks so much.
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