There is usually three basic approaches that are used to enable an individual to value his or her business. They include the market approach, the income approach, and the asset approach. This website will discuss these approaches in order for an individual to be able to determine the worth of his or her business. We begin with the acid approach which is based on the principle of substitution. In this approach, the buyer or investor is assumed that he or she cannot pay more for a particular business than the cost to reproduce it right across the street. This is an important approach where there is a check on how the employee and employer treat the clients and the business reputation in the market.
It is important to value and understand the asset approach and the limitations that it has. This approach is useful in intensive companies where it is used to indicate the value of the high assets in such a company. There are times when it is used as a liquidation value for the services given in a certain company by both employee and the employer of that company. The work of both market approach and the income approach is capturing the value of the company’s goodwill or the intangible value. This has always been used to value the worth of the business that is service oriented.
The income approach will operate under the assumption that any buyer is willing to pay for the cash flow which the business is set up to produce going forward as of the date of sale. These buyers will buy the cash flow. This can be determined by how much the buyer has a will to pay to access the cash flow of the business that is depending on the risk that is associated with him or her actually receiving it once the business owner exists.
When the business has a consistent history of steady cash flow and growth, a buyer is likely to pay a lot of money for the cash flow stream which is less risky here. This cannot be seen in a similar business with unstable and unsteady cash-flow and which cannot be reoccur in future periods meaning it is riskier.
The market approach requires a business person to do research on various businesses in the market, compared these businesses, make a comparative data will help him or her to value the business and know how it is doing in the market. Things including the leverage, assets, liquidity, turnover, revenue, growth, and many more are used to gauge the business in order to determine the value of the business and its place in the market. This is very important in understanding the transaction and the history of the market and the business and also the prices that are related to various financial metrics of these companies.