3 Major Business Valuation Methods Every Entrepreneur Should Know

Some business owners have a mistaken impression that knowing their business’ worth is unimportant if they don’t intend to sell anytime soon. Business valuation in India is neglected due to the same reason. It is always good to have an idea about the market value of your business.

Regardless of the reason for company valuation in India, how much it is worth depends on many factors. Different businesses may take various approaches, but the best valuations use more than one method. Business valuation might get confusing sometimes, that’s where we come in.

Even if you hire a broker to value your business, it’s important to understand how business valuation approaches work. Here we will teach you about the three major business valuation methods all entrepreneurs should know.

The income-based approach:

The income-based approach is the idea that a business’s real value lies exclusively in its capacity to create cash in the future. The most used income-based approach for evaluating businesses is Capitalizing Past earnings.

With this method, the validator determines an expected level of future money flow for the business by using the company’s record of past earnings, then normalizes them for unusual expenses and multiplies the expected money-flow by a capitalization factor.

Discounted Future Earnings is another income-based approach to business valuation. Instead of an average of past earnings, use an average value of the trend of predicted future earnings and divides it by the capitalization factor.

Market value business approach :

The market value method establishes the value of an organization by comparing it to other identical organizations from the same industry that have sold recently. The asset approaches place a fair market value on what the business owns. This method is not used unless there are enough businesses for comparison.

The market value method is particularly difficult for sole proprietorships, which have sole owners. Trying to find public information on prior sales of related businesses is a difficult task.

Asset-Based approach:

The asset-based approach of business valuation sums up a company’s investments. This option is great for owners who treat their business as an investment rather than just a source of income. It’s a very direct approach and follows a simple rule: a company is worth the total of its parts.

There are two main methods of valuing a business by its assets.

  • Asset accumulation method: For this method, a business compiles a basic spreadsheet while comparing of all its assets to all of its liabilities.
  • Capitalized excess earnings method: This sums together the value of the tangible business assets with excess earnings.

The reason for considering valuation is that every business has a different model. Even if you’re not planning on selling your business, having an assessment of your business is a good idea. Small business valuation methods are similar to the big business valuation, thus leaving no excuse for you not to evaluate your business. When you go to raise capital, showing that you have an understanding of the economics of your business will only benefit you.

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Written by Rubina S

I am Rubina, a professional writer, and a freelance blogger for the past three years. I've spent my professional years curating content for many websites across a wide range of topics and have developed and expertize in writing copies that entertain and educate.

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