People seek business valuations for a variety of reasons. Often, triggered by a court order in divorce proceedings or to settle a dispute. Valuations can also be obtained in anticipation of buying or selling your business to a third party.
In today’s podcast, Ryan Moore, a manager at Riney Hancock CPAs, tells us about the methods used to determine the fair value of your business. Someone with the right expertise and competence such as a CVA or ABV should conduct your valuations.
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Two well-known professionals in this field are:
- Certified valuation analyst (CVA), accredited by the National Association of Certified Valuators and Analysts;
- Accredited in business valuations (ABV), a designation awarded by the American Institute of Certified Public Accountants (AICPA).
Business Valuations Methods:
- The income approach, which assumes the value of your business, is a function of the economic benefit of the business. Commonly used for service-based businesses.
- The asset approach, which assumes the value of your business, is calculated by the assets owned by your business. Commonly used for businesses that are investment oriented.
- The market approach assumes the value of your business and is influenced by historical sales of comparable businesses.
- The average value of a business can be obtained by using the above Three methods.
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Understanding the Asset and Market Approaches to Valuation
Beyond the income approach, two additional methods are commonly used by credentialed valuators. The asset-based approach calculates value by totaling all business assets — both tangible and intangible — and subtracting liabilities. This method is particularly useful for holding companies, real estate entities, or businesses being liquidated, where the underlying assets carry more weight than future earnings potential.
The market approach determines value by comparing your business to similar companies that have recently sold. Valuators reference databases of private-company transactions to identify relevant multiples, such as price-to-earnings or price-to-revenue ratios, then apply those multiples to your business’s financial metrics. This approach works best when sufficient comparable transaction data exists within your industry.
In practice, a qualified valuator often blends two or more of these methods and applies a weighted average to arrive at a defensible conclusion of value. Factors such as minority interest discounts, lack of marketability, and industry risk can further adjust the final figure, making professional expertise essential regardless of the purpose behind the valuation.