Valuation

Financial Dictionary -> Investing -> Valuation

Business Valuation is much like any other valuation in that it's the process that assesses the value (monetary worth) of a business and tries to determine the price it can sold for. There are an infinite number of factors that can determine the value of a business, such as successful years in operation, number of employees, location etc, but an appraiser generally looks at the following approaches:

Assets - the asset approach is to simply calculate the value of all the business' tangible assets if they were sold or had to be replaced. A simple example would be an online T-Shirt printing business. The cost of the printer, ink, blank t-shirts and website would all be added up to give a total amount.

Market - the market approach uses indicators from the market the business is trading in. Various financial ratios are used involving earnings, sales etc and compared to data from other similar business. Thus a comparison with other businesses in the market can reveal if the business is worth more or less than its competitors.

Income - the income approach uses various calculations to determine the business' value in relation to its income, costs, profits etc and usually results in a multiplication of the business' profits over many years. For example if the monthly profit is $5,000 then the value can be determined by multiplying that figure over a given time period.

Combinations of these three approaches can result in a relatively fair valuation of a business, but at the end of the day it can only go for as much as somebody is willing to pay for it, leading to bidding rather than a fixed selling price.

Various accountancy documents such as a business' balance sheets give an indication of its current worth right at that time.