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About Business Valuations

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Business Valuations - Approaches and Methods

Commonly Used Methods of Valuation Are Grouped Into Three General Approaches

Asset/Cost Based Approach

Asset/cost-based approach

The asset based approach is defined in the International Glossary of Business Valuation Terms as "a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities." Any asset-based approach involves an analysis of the economic worth of a company's assets in excess of its outstanding liabilities. Thus, this approach addresses the book value of the Company as stipulated in .

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While this ruling clearly applies to holding companies, asset based approaches can also be valid in the context of a company which has very poor financial performance. An important consideration when using an asset approach is the premise of value, both for the company and for individual assets.

Income Approach

Income Approach

Revenue Ruling 59-60 clearly requires that an income approach be used when it lists "the earning capacity of the company," as a factor to be considered. The income approach is defined in the International Glossary of Business Valuation Terms as, "A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount." This method is the most utilized method by analysts for "Going Concerns".

Market Approach

Market Approach

The idea behind the "Market Approach" is that the value of a business can be determined by reference to reasonably comparable guideline companies ("Comps") for which transaction values are known. The values may be known because these companies are publicly traded or because they were recently sold and the terms of the transaction were disclosed. For a business valuation professional, a good set of comps may be as few as two or three – and sometimes no comparable company data can be found. The objective of analyzing these comparable sold companies is to determine if the comparable company has a similar risk profile to the subject company. There are three sources of comparable company transaction data: Public Company Transactions, Private Company Transactions and Prior Transactions of the Subject Company.


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This approach is commonly used especially in contexts where the user(s) of the analyst's report do not have specialized business valuation knowledge. There is an obvious parallel in a lay person's mind to consulting with a real estate agent prior to listing your home for sale to find out for what amount similar homes in your neighborhood have sold. The market approach is the most common approach employed by real estate appraisers. Real estate appraisers generally have from several to even hundreds of comps from which to choose. However, the opposite is true in finding comparable businesses that have sold for which the relevant data is available. Not only is the data pool for sold businesses a fraction of the size of the data pool for sold real estate but the dissimilar nature of the subject company and the comparable company often negates the usage of the comparable company data. Consequently, while the "Market Approach" IS the preferred approach it is rarely utilized.