Valuing your business can come with a range of advantages. Whether your ultimate goal is to grow your business, sell it, or refocus its objectives, a valuation can be incredibly useful and insightful.
There are three main approaches that can be used: asset, income, and market. Choosing the best method will depend the valuation’s purpose, and each one can yield a unique and entirely different result.
The asset approach determines the value of a business based on the difference between certain assets and liabilities. This method is beneficial when owners want to look at their company’s liquidation value, or if the business has a lot of assets but inconsistent revenue.
The income approach, on the other hand, values a business based on the profits that it generates. Unlike the asset approach, the income approach is great for businesses with consistent revenue. Companies that are production- or service-based are more likely to benefit from this particular approach.
The third method, or the market approach, takes into consideration the value of a particular business while simultaneously considering the already established valuations of companies with similar size and revenue. Companies that benefit from the market approach will have a similar characteristic to companies that benefit from the income approach with regards to the consistency of revenue.
Be sure to consult a professional who can assist you in choosing the appropriate method for your company. For example, a business that has many assets but no steady cash influx may appear to have a low value if we use the income approach. However, this valuation would be completely different if we examined the company using the asset approach. Knowing which method to use can make all the difference.
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