What Are the 3 Methods of a Business Valuation?

October 11, 2019

Business valuation is often necessary when establishing a partnership or getting ready to sell a business. Because of the complexity and detail involved, it is important to use an accountant service Los Angeles to ensure it is done correctly. There are three main methods that can be used when figuring out the value of a company.

Earning Value

This method determines value based on its earning ability in the future. An Encino Accountant will typically take one of two approaches to figure this out. The most common one is capitalizing past earning. This takes into account past earnings and gives an idea of the risk level. The other approach is discounted future earnings, and this determines an average of potential earnings, which is divided by the capitalization factor.

Asset-Based

This is also known as a cost-based method, and it estimates what the value is based on what it costs to create a similar business. Los Angeles Accounting can determine this value via a liquidation basis or on a going concern. With the liquidation approach, the value is figured out after liabilities are paid and all assets are sold. With the going concern assumption, the liabilities are subtracted from the asset value with the understanding the business will continue to operate without the need to liquidate.

Market Value

With this approach, accountants look at comparable businesses that have sold recently. For this method to be the most effective, there should be a decent number of similar establishments sold.

The Right Method for Your Business

Each business requires a different method to determine value, and the best one depends on the size of the business, the number of years in operation and other factors. It is best to discuss it with an accounting firm that has experience and knowledge in this area so the right method is applied for the best business valuation.