Valuing Your Business
The most common approaches are:
The market approach is based on finding prices for comparable businesses or transactions in the public or private markets and using them to infer the value of the business or transaction. Two methods to determine the market value of a business are:
- Current market value: applicable if stock is actively traded in the stock market.
- Comparable: identify a publicly traded business with comparable characteristics and calculate multiples based on the performance
The income approach is based on determining future earnings and calculating the present value. Two common approaches are:
- Discounted cashflow method: Involves projecting future cashflows, income and expenditure. Calculating a terminal value and discounting them to present value.
- Capitalised cashflow method: A shortened version of discounted cashflow where both the growth and discount rate as assumed to remain constant into perpetuity
This is based on the value of business being equal to the sum of all the parts of the business. Adjusting book value of each asset or liability to fair market value.
So, which do you use: it depends on the specific circumstances of the business being valued.