Business Valuation 101

Business valuation is the process of determining the monetary value of a business or a companyBusiness valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership value, Joint venture valuation, merger and acquisition value, determining inheritance tax liability and divorce proceedings

Business Valuation is an inexact science at best and all of the methods used to value businesses include different degrees of subjectivity.  However, each of the different methods of valuing a business have different advantages in different situations and some capture important aspects in valuing a business which are not recognised by others.

Two accounting processes underpin valuation of businesses focusing upon the distinction between the two principal accounting flows: the flow of earnings and the firm’s cash flow.

There are four basic methods of valuation: –

  • the asset based approach,
  • relative valuation methods,
  • flow methods and;
  • contingent methods of valuation.

 

Economic Value Added (EVA®) and how it relates to the valuation of businesses is emerging as an important concept to be incorporated in valuation of businesses as Economic Value Addition is an indication of future value. This plus the concept of option pricing theory (OPT) will be increasingly used in Business valuation in the future.

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