Business valuation methods pros and cons

Time and again business people ask: which business valuation method is the best? The answer is, it depends.

If the business operates in a market niche where many similar companies sell, the market approach methods are a good choice. You can easily support your business value conclusions by pointing to a number of recent business sales as supporting evidence.

The downside is that no two companies are the same. A closer look may reveal that your business is unique in some respects making market comparisons misleading.

The asset approach to valuing a company is very supportable as long as the industry is not going through a rapid technological or economic change and the underlying business assets can be evaluated for their physical condition and marketability.

The downside is that the investors may not be currently interested in investing in these types of business assets. If the market is sluggish, the asset approach to valuing a company may look somewhat contrived.

The income approach to business valuation gives you the tools that are preferred by professional investors. Using such methods as the discounted cash flow technique, you focus on the fundamentals of the business itself that define its risk profile and earning power. This combination of risk and return is at the hart of business value measurement.

The difficulty is in creating accurate forecasts of future business earnings. No one has a crystal ball, and future events may not play out the way you like. Your business valuation results are no better than your assumptions.

In the end, business valuation is a statement of opinion. If you trust your judgment or that of your business appraiser, all is well. If you doubt the conclusions, ask for a second opinion.

If you are happy with the business valuation result, and can defend it convincingly to others, you probably have the right answer.

See Valuation Tour