If you are thinking about buying a business or merging with another, then there are several things to consider before doing so. It may be new and exciting to merge or buy out a new business. Growing your business or company is, of course, the goal. But, the problem is that many business owners will to quickly pick up other companies, hoping that they will benefit their own, original company and it ends up tearing the whole thing to pieces. The main thing that you want to find out before signing on a new company is the business value. In order to know that, you will need to determine which valuation market approach you will take should be decided fairly quickly so that you can find out the business valuation services you will be needing. A business valuation analysis is very important especially when it comes to small business valuations because it will help you determine whether or not the business or company is worth merging with or buying or otherwise incorporating into your own business.
What is a Valuation Market Approach?
This is basically a way of figuring out what the appraisal value of various assets are. It is typically used to calculate what the value of a property or business is. When valuating a business, the valuation market approach is used determine owner interest, security and intangible assets, among other thing. The way that a valuation market approach works is that it compares other, more recent sales of assets that are similar. Obviously, adjustments have to be made to take into account the difference of size, quantity and quality.
While this a quite an accurate measurement of the value of a business, the market approach is just one of three main ways that a business is valued. In order to get a well rounded number you may want to incorporate two other methods into your process. The other two valuation approaches are income approach and asset approach.
What is the Income Approach?
In a nutshell, this method of approach figures out what the business value is by using determining how able it is to generation economic benefits for whoever owns the company. The business value is determined as a function of the benefit based off of the income methods. The economic benefits can vary based on the goals of the owner but the main thing that is usually calculated is the seller’s discretionary cash flow, also known as the net cash flow. Properly determining the capitalization and discount rates as well as the valuation multiplies will be crucial to making the income approach an effective method to use. Some common methods that are used within the income approach method are below:
- Discounted cash flow method
- Capitalization of earnings method
- Discounting methods
- Capitalization methods
What is the Asset Approach?
This method uses the company’s asset to determine the value. The fair market value is typically the standard used to determine what the value of its assets are compared to its liabilities. Utilizing the accumulation method and then capitalized excess earnings method are the best ways to determine a business valuation using the asset approach method. Using the assets to find out the business value is very beneficial because within that process you will need to find out how much debt the business is in and if it will be worth you acquiring the company if you are going to responsible for that debt. If their assets will pay it off then it might be okay but if not, you will have problems.
By using one of these methods, you can get a fairly accurate number that will represent the value of the business you are considering acquiring. However, if you use two or even all three of these methods, that will show you almost exactly what the value of the business really is. While utilizing every method may be a little expensive for your company, either way it will be worth it. If you find out that the company is not worth going into business with, then you have saved yourself a lot more money than what you spent on the methods. If the business is what you are looking for, then it will bring profitability to your company anyway.