The different methods of business valuation

To be frank, there’s no one singular way to value a firm, because the valuation of a business can mean different things to different people. Determining the value of a business entails coming up with a sound process and setting clear steps toward reaching such end, explains private equity professional Tyler Tysdal.

Any entrepreneur should be aware that business value is driven by economic conditions and will fluctuate based on various sale scenarios. The worth of a business is, therefore, essentially an anticipated price during the time of sale or wind up, with the actual closing price varying. However, analysts often adopt three methods when valuating business firms, with the first being the asset approach. This measures the worth of a firm based on a combination of its assets and liabilities. It asks the question, "What will it cost to create a similar business and still produce the same economic gains?"

The second is called the market approach. Here, the value of a firm is reached mainly via given market forces. It is essentially concerned with gauging the worth of similar businesses. It is driven by the economic principle of existing competition, with the premise that no business operates in a vacuum, and similar players are most likely doing the same thing or following the same business model or plan.

Finally, there’s the income approach, which puts the premium on money generation. Here, the economic principle of expectation applies. The focus is on foreseen economic gains given the investment of time, money, and effort into a business endeavor. Aside from figuring out what kinds of economic benefits a business is likely to fetch, this approach also factors into the risk a company’s income valuation. This is usually done via discounting and capitalization, adds Tyler Tysdal.

Private equity and real estate investor Tyler Tysdal graduated from Georgetown University with a BSBA in Finance and received his MBA from Harvard Business School. For similar reads, check out this page.