Business Valuation

Business Valuation is the process of determining the economic value of a business or company. Business valuation can be used to determine the fair value of a business for a variety of reasons,  including sale value, establishing partner ownership and divorce proceedings.

There are a variety of business valuation techniques used for determining a fair price for a business.  These include:

• Asset-based approaches – this technique values the business based on asset minus liability estimation.  This can be done with the business as a going concern where the balance sheet is used for the basis of estimate, or a liquidation approach which estimates the net cash proceeds from liquidating the business.
• Earning value approaches – this technique involves estimating expected cash flow from past earnings records, then multiplying the cash flow by a capitalization factor.  The capitalization factor reflects what rate of return would be expected by a reasonable purchaser.
• Discounted future earnings – this technique involves the use of predicted future earnings (rather than past earnings) divided by a capitalization factor.

There is a truism in the venture capital industry that “the value of a company is only what someone is willing to pay for it.” In other words, in the end, the market – and your ability to attract investors and negotiate with them – will determine the value or selling price.

Cite Term

Definition Sources