Three Approaches to consider when assessing Business Value
Updated: May 30
Often times, small business owners are simply looking for a quick way to determine the fair market value of their businesses. When it comes to business valuations, one can apply three different approaches: asset approach, income approach or market approach. A - Asset Approach - Using the adjusted net asset method one can calculate value by taking the difference between business assets and liabilities. For example, if you have $500,000 in assets and $200,000 in liabilities, the value of your business is $300,000 ($500,000 – $200,000 = $300,000). Typically, this is not the valuation method you want to use if you have a profitable going concern business.
I - Income Approach - One of the most commonly used methods under the Income Approach is the Discounted Cash Flow method. This method can be challenging for small business owners to comprehend and calculate. In short, one must determine the business’s future economic benefit using forecasting techniques, and make necessary adjustment for other factors including but not limited to executive compensation, growth rates, cost structure, taxes, and working capital. One must then discount that future economic benefit to a present value based on the level of risk associated with the business. M - Market Approach - Another method business owners can use is the market comparables or transaction method. The basic principle here is that you will use other similar businesses' historical transactions to determine a comparable multiple to apply to value the business. Due to the complexity and litigious nature of certain valuations, Trustee Capital LLC has a team of certified valuation experts who are ready to help determine, defend and optimize which method is right for. For further information, contact us at 813-397-3648 to schedule a consultation.