What is a business valuation?
Business valuations are often used to resolve disputes related to estate and gift taxation, divorce litigation, allocation of business purchase price, and many other business and legal disputes.
A business valuation is the process to determine the fair market value of an owner’s interest in a business. Consider the following example. You own Apple stock and you want to know how much it is worth. Well, all you have to do is pick up the business section of the daily newspaper or go to any financial website, locate the stock and multiply the number of share you own by the closing price.
In concept, valuing your private business is the same as valuing Apple stock. However, your business is private and there is no stock table that you can conveniently turn to. But no need to worry because there is a pseudo-science, or some may say an art form, that provides the foundation to estimate what your private business is worth. In general, a business valuation commonly uses three different approaches: the income approach, the asset-based approach, and the market approach. The income approach determines value by calculating the net present value of the benefit stream generated by the business; the asset-based approach determines value by adding the sum of the parts of the business; and the market approach determines value by comparing the subject company to other companies in the same industry. Each technique has advantages and drawbacks, which must be considered when applying them to a particular business.
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