There are many options available if you are looking to get your business valued. A simple online search for “business valuation Chicago” will find you a local valuation expert, but what approaches might they use? Well, there are three general approaches that are considered to determine the value of a business. The conventional approaches include the cost, income and market comparison approaches, or a combination of the three. These approaches can be summarized as follows:
In the Cost Approach, the aggregate value of the company’s assets is netted against the estimated value of all existing and potential liabilities, resulting in an indication of the value of the business enterprise. The resulting indication of value often represents a minimum, or floor value that a company may reasonably expect to realize, often through the liquidation of its assets.
The Income Approach considers expected returns on an investment, which are then discounted or capitalized at an appropriate rate of return to reflect the risks and potential rewards associated therewith. These valuation methods include (1) Discounted Cash Flow and (2) Capitalization of Income. These methodologies focus on the income-producing capability of the business enterprise.
Two commonly-used methodologies for business appraisals in the Market Comparison Approach are (1) the Guideline Public Company method, which focuses on comparing the subject company’s risk profile and growth prospects to select reasonably similar (or “guideline”) publicly-traded companies and (2) the Guideline Merged and Acquired Companies method, where consideration is given to pricing multiples in recent merger and acquisition transactions that have occurred in the subject company’s industry or in related industries.
There exists additional valuation methods within each of the above valuation approaches. The specific valuation techniques used in a valuation engagement depend on the facts and circumstances specific to each case, including the nature and characteristics of the business enterprise being valued, and the purpose of the business appraisal.
To discuss which approach or combination of approaches is appropriate for your business or our business valuation services, contact Greg Huff at 410-997-6000.