There are various approaches for business appraisers to utilize in determining the value of a business. Each approach has various methodologies that can be employed to determine the value of a business. The appraiser must then select the appropriate approaches and methods to apply to the company’s specific conditions to arrive at an indication of value. The approaches that the business valuation professional may consider include:
- Income Approach—The Income Approach derives an indication of value based on the sum of the present value of expected economic benefits associated with the company. Under the Income Approach, the appraiser may select a multi-period discounted future income method or a single period capitalization method.
- Market Approach—The market approach derives an indication of value by comparing the company to other similar companies that have been sold in the past. The “guideline publicly traded company method” uses the prices of similar and relevant public companies as guidelines for determining the value of a closely held or family controlled business. The “direct market data method” relies on transaction data of similar closely held and family controlled businesses to determine an indication of value.
- Asset Approach—The Asset Approach adjusts a company’s assets and liabilities to their fair market values and adds to the Balance Sheet the value of intangible assets and any contingent liabilities. While tangible assets can be appraised and reported on an adjusted Balance Sheet accordingly, the valuation of intangible assets such as reputation, employee talent, etc. is more complicated.