A Guide To Different Types Of Business Valuation Methods

Business Valuation Methods

Business valuation refers to the process of evaluating the economic worth of your business. Most of the people go for business valuation when they have to sell their business, or look for investors. However, it is extremely hard to evaluate a business, because it is a complex process. As there can be different types of business worth, there are different business valuation methods. While most of the people rely on professional help for business valuation, it is important to do the homework and learn about the common methods of business valuation.

To help all our readers with this information, we are going to share the most popular methods of business valuation in the following sections. So, read them carefully and then take help from some reputed company that offers business valuation in Dubai. Before we begin, we want to stress the importance of a professional business valuation expert. The experts know the current business trends in your region as well as the domain of your business. They are also well-versed with the market forecasts and projections of business experts of your domain. Further, they have an immaculate grasp over the government policies and regulations that help you in perfect evaluation.Business Valuation

Sometimes many business organizations may face a lot of obstacles to accomplish perfect business valuation services, such as they need to adopt effective tools and strategies. Dubai is emerging as one of the most powerful business hubs for international businesses. In this case, accounting and audit firms in Dubai would aid them with their services. The main purpose of accounting firms is to provide the best services to their clients with minimum consumption of time and maximum efficiency. Getting the right business valuation process can help your business to achieve maximum profitability. So, always proceed with a business valuation expert. Now, read about the different types of business valuation methods.

Asset-based Valuation Method

The asset-based business valuation method determines the economic worth of your business on the basis of its assets. So, all the assets are identified and analysed to arrive at your company’s worth. The value of your business is equal to the net asset value, minus the total liabilities value. The asset-based business valuation method can be approached in two ways:

#1 Going Concerned

If you are planning to operate after business valuation (i.e., you are not looking for business liquidation), then you can use the going-concern approach for business valuation. In this case, the value of assets is identified and the total liability value is subtracted from it. The remaining amount is called the businesses current total equity.

#2 Liquidation Value

This is the other approach for the going-concern method of business valuation and works on the assumption that the business being evaluated is finished. It is also assumed that the assets will be liquidated. This type of business valuation is based on net cash. The net cash is the amount that you can arrive at in a scenario where the business is sold along with its assets. One of the drawbacks was that in this approach, the value of assets is lower than usual, as liquidation amounts to a lesser value than fair market value.

Hence, the asset-based method approached the business valuation with an urgency that many other methods don’t.

Market Value Method

The market value method of business valuation is often termed as the most subjective approach for evaluation of the worth of a business. In it, your business is compared to the other similar businesses that have been sold. As this method applies to the businesses that have accessed sufficient market data about their competitors, it is highly subjective. Hence, it is one of the challenging approaches when it comes to the sole proprietors.

One of the reasons for this can be the lack of or the difficulty of finding comparative data related to the similar businesses sold. This is because most such businesses are sold individually.

Now, because this method is relatively less precise as compared to the other methods, the final business valuation depends on negotiation in the cases of business liquidation. The same holds true when you are seeking an investor and especially if you’re selling your business or you are evaluating your business for seeking an investor. Negotiation on the immeasurable factors might be one way to find better prices in this scenario.

One of the advantages of this approach is that you get a good initial idea of your businesses worth.

ROI-Based Valuation Method

This method evaluates your business on the basis of your profit and the values of return on investment (ROI) that a potential investor can receive after buying or investing in your business. This business valuation method is also subjective as an investor might want to know the kinds of returns he or she will be getting from your business, which ultimately depends on the market scenario.

As an investor views the business from the profit point of view, he might be concerned about a lot more things like:

  • Time required to recover the original investment
  • Amount of return based on the comparison between the investment and the expected net income
  • Amount of ROI is incremental or not, or reasonable or not
  • Discounted Cash Flow (DCF) Valuation Method

It is one of those alternate approaches for business valuation that uses more of the financial data related to your business for a better evaluation. This method is also known as the income approach as it evaluates a business on the basis of projected cash flow. This cash flow is, however, adjusted to its present value.

The Discounted Cash Flow method can be employed in situations where your profits are expected to be inconsistent in the coming time. However, it is more technical in nature as it involves careful calculations and requires significant business details.

Capitalisation of Earnings Valuation Method

This method calculates the future profitability of a business based on various factors, such as cash flow, expected business value and annual ROI. It is the best method for stable businesses because it assumes the calculations for a single period to continue.

Book Value Valuation Method

This method does the business valuation on the basis of your balance sheet. The balance sheet is used to calculate the equity (assets minus liabilities) and calculate the business’s worth. It is good for businesses with valuable assets but low profits.

Multiples of Earnings Valuation Method

This method also evaluates a business on the basis of its future earning potential. It is perfect for small business valuation and is also called the time revenue method. A multiplier is assigned to the current revenue of a business, and it’s worth is evaluated. These multipliers generally vary with the industry and economic climate etc.

This completes our list of the different methods of business valuation. We hope all our readers find it useful.

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