Of course, when there are similar businesses to sell its products in the same area, The value of any one of them will be determined by the other. Hence the need to evaluate the business. Here, We try to mention Most Common Business Valuation Methods.
Businesses Valuation Methods
1- Market Value
A market value business valuation formula is perhaps the most subjective approach to measuring a business’s worth: This method reaches the value of your business by comparing it to similar businesses that have sold. Of course, this method only works for businesses that can access sufficient market data on their competitors.
a market value method is a good preliminary approach to gain an understanding of what your business might be worth, but you may want to bring another approach to the negotiation table.
2- Asset-Based Business Valuation
As the name suggests, these approaches consider your business’s total net asset value, minus the value of its total liabilities, according to your balance sheet. There are two main ways to approach asset-based business valuation methods:
Businesses that plan to continue, and that none of its assets will be sold off immediately, should use the going-concern approach to asset-based business valuation.
- Liquidation Value
the liquidation value asset-based approach to business valuation is based on the assumption that the business is finished and its assets will be liquidated. The net amount is what would be realized if the business is terminated and its assets sold off.
3- Future Maintainable Earnings Valuation
The profitability of your business in the future determines its value today, and you can use the future maintainable earnings valuation method for business valuation when profits are expected to remain stable.
To calculate your business’s future maintainable earnings valuation, evaluate its sales, expenses, profits and gross profits for the past three years. These figures help you predict the future and give your business a value today.
4- Discount Cash Flow Valuation
If profits are not expected to remain stable in the future, use the discount cash flow valuation method. It takes your business’s future net cash flows and discounts them to present day values. With those figures, you know the discounted cash flow valuation of your business and how much money your business assets are expected to make in the future.
5- Historical Earnings Valuation
A business’s gross income, ability to repay debt and capitalization of cash flow or earnings determines its current value. If your business struggles to bring in enough income to pay bills, its value drops. Conversely, repaying debt quickly and maintaining a positive cash flow improves your business’s value.
6- Relative Valuation
With the relative valuation method, you determine how much similar businesses would bring if they were sold. It compares the value of your business’s assets to the value of similar assets and gives you a reasonable asking price.
7- Profit Multiplier
In profit multiplier, the value of the business is calculated by multiplying its profit. For example, if your company’s adjusted net profit is $100,000 per year, and you use a multiple like 4, then the value of the business will be calculated as 4 x $100,000 = $400,000