Business valuation is the process of estimating the economic value of a business. The purpose of business valuation is to determine the fair market value of a business. Business valuation can be used for a variety of purposes, such as:
- Setting a selling price for a business
- Determining the value of a minority stake in a business
- Negotiating the sale price of a business
- Valuing a business for estate planning purposes
There are two main approaches to valuing a business: the asset approach and the income approach. The asset approach values a business based on its assets, while the income approach values a business based on its ability to generate income. Businesses can also be valued using a combination of both approaches.
The asset approach to business valuation is based on the principle of substitution. This approach values a business by estimating the market value of its assets and liabilities. The asset approach is typically used for businesses that have a lot of physical assets, such as manufacturing businesses.
The income approach to business valuation is based on the principle of present value. This approach values a business by estimating its future economic benefits and discounting them back to a present value. The income approach is typically used for businesses that generate a lot of revenue, such as service businesses.