Business Evaluation Methods | NY Zone Exchange

The value of your business depends on different factors that include the current state of the world economy and the balance sheet of your business. Valuation must be done by an expert but not by the owner himself. A lot of evaluation methods will be used to determine a real price for your business.

Asset-based evaluation methods subtract the value of business liabilities and its assets, or they determine the cash that would be got if all assets were sold.

Earning value approaches to determine the cost of a company as other evaluation methods are based on the idea that a real business value is in its ability to produce wealth in the future. This approach helps to determine an expected level of cash flow and a valuator uses a record of the past earnings of the company, then normalizes them for expenses or unusual revenue, and multiplies the expected cash flows by a capitalization factor. What does a capitalization factor do? It demonstrates the rate of return and a measure of the risk that a reasonable buyer can expect investing in the business.

Alternate earning value approach – discounted future earnings – takes average predicted future earnings and divide them by the capitalization factor. Well established business shows a capitalization rate of 12-20%; unproven business shows higher capitalization rates.

Market value approach to evaluation is determine the value by comparing your business to similar ones that have been sold lately. But this business evaluation method will work in a proper way only if there is a sufficient quantity of similar businesses represented to make a quality comparison.

The fairest way to determine a selling price for most businesses will be a combination of business evaluation methods but not using only one of them, though the earning value approach is the most widespread business evaluation method.