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Before Buying a Business: The Different Methods of Business Valuation

February 27, 2012 | Comments: 0 | Views: 152

Valuation refers to the process or set of procedures used to appraise the economic value of a business. It is commonly used by financial market participants to estimate the price they are willing to pay or receive after selling a business. Other purposes of valuation include computation of estate taxes and stocks of shareholders, identification of a company's intangible assets, and appraisal of real estate holdings. So if you're planning to purchase a business, it's only important to have it undergo proper valuation beforehand.

However, valuating a business is not as easy as it sounds. There are numerous acceptable valuation methods used, but all of them may not yield similar results. In an actual business sale, it's expected that both buyers and sellers will determine the fair market value of a business asset first before it is acquired or sold. The fair market value may be determined by considering the factors such as the nature of the business, the company's earning capacity, the company's dividend-paying capacity, the economy and industry's outlook, the size of the sales being valued, the market prices of similar lines of business, and the company's intangible assets.

There are three types of business valuation methods: the asset-based approach, the earning value approach, and the market value approach. The asset-based approach sums up all the investments of a business. The asset-based approach can be undertaken through the going concern approach which lists the value of the assets of a company, and subtracts the value of its liabilities. Another approach is the liquidation approach, in which net cash is determined by estimating the value of the company once its assets are sold and liabilities paid off.

The second approach is the earning value approach. This method is used by a business evaluator to determine a company's worth by multiplying the expected normalized cash flow to its record of past earnings. Another method is the discounted future earning approach in which the average of the company's trend of predicted future earnings is used and divided by the capitalization factor instead of its past earnings.

Lastly, there is the market value approach, in which a business valuator attempts to establish the value of a business by comparing it to similar businesses that have been recently sold. While it may be the most popular business valuation method, it's only going to work if there are enough similar businesses to compare it to.

If you want the transaction to be a success, find business valuers that use effective appraising methods. Browse the Internet for a list of professionals in your area. Buying a business involves a lot of money, and you will want to save as much as possible.

For more details, search business valuator, and business evaluator in Google.

Source: EzineArticles
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