Three methods of business valuation

1] Asset Valuation
This is an accounting-based approach that subtracts business liabilities from business assets to reveal the business value.
The complexity of this approach lies in deciding on what assets and liabilities to include and at what value to place them? Any asset that is not included on the balance sheet will not be accounted for in the valuation. The profits made by a company are not taken into account with this approach.

2] Discounted Cash Flow
The Discounted Cash Flow (DCF) approach is a technical valuation technique used with moderate to high cash generating companies. It works by looking at today’s value (at a given rate of return) of the accumulated profits of the business over a number of years added to the value of the business in today’s terms if it were sold at the end of this period. This approach is not easy to apply, in order to forecast the future cash flow of the business a full financial model needs to be prepared.

3] Comparables Valuation
This method attempts to extrapolate or interpolate the value of the business by using information collected on similar business sales in similar markets. This approach is the closest simulation of a true market-led valuation.

These are the most common valuation approaches used in the market. However there are many more, you need only go to half a dozen business brokers or valuers and ask them to determine the value of the company and to explain to you how they get to the figure.

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