A set of assumptions and a choice of valuation methods made for calculating the value of a business.
What It Means
Accurate business valuation requires that you make a number of choices that are unique for each business appraisal:
- A set of assumptions made about the business valuation.
- The selection of business valuation methods to be used for calculating the business value.
In the language of professional business appraisers, the assumptions boil down to these two important choices:
Your assumptions drive business valuation results
It makes a big difference to the business appraisal result if the business is to be sold on a going concern basis rather than being liquidated at an auction. This is an example of two very different premises of value – going concern and forced liquidation.
Similarly, a defensible business valuation result presented to a tax authority may be different from that prepared for a group of strategic business investors. Here, the difference is in the choice of the business value standard - fair market value versus investment value.
Business valuation methods for every situation
You can calculate what a business is worth using a number of well-known business valuation methods. The choice of the methods to be used depends upon the specific business being valued.
For example, a young start-up has little historic track record. Income business valuation methods such as the Discounted Cash Flow are an excellent choice to value such companies since they require future business earnings forecast and risk assessment.
For a well-established company, the value of business goodwill may be considerable. In this situation, the Capitalized Excess Earnings valuation method may be an appropriate choice.
If your business is in the industry where similar companies sell often, you may decide to use market business valuation methods. These methods let you estimate your business worth by comparing the actual selling prices and financial performance of similar sold businesses.
Asset-rich companies such as manufacturing or real estate-driven firms, may benefit from using the asset accumulation business valuation method. If the company is sold, the business valuation can be used to properly allocate the business purchase price in order to recover the initial investment quicker and reduce taxes.