There is no single method for determining the value of a business; the method depends upon the circumstances surrounding the business and its individual characteristics. Traditionally, the development of a value opinion of a business is based on the three basic approaches to value, after a full qualitative and quantitative assessment of the underlying business. Values derived through one or more of these approaches are then analyzed in order to develop an objective opinion of value. A brief description of the three approaches follows:
The Income Approach measures the value of a business based on the expected future monetary benefits attributable to the company being appraised. In other words the value today of a business is dependent on two key variables – how much do you expect to receive over the time the business is owned and the return you expect on your initial investment. The risk of achieving the future monetary benefits can be included in either component.
The Market Approach is based on comparing the company being appraised to comparable publicly traded companies or to comparable businesses which have been recently acquired in arm’s-length transactions. The market data is then analyzed and adjusted for any significant differences, to the extent known, between the guideline companies and the company being valued.
The Asset Based (or Cost) Approach is a general way of determining a value indication of a business using one or more methods based directly on the value of the assets owned by the business, less liabilities.