Three Most Common Methods of Undertaking Business Valuations

Business valuation is the process of determining the economic value of a company or business. Valuations are typically performed when a company is being sold, during mergers and acquisitions, for disputes, family law purposes, restructures, succession planning or for tax purposes among many other purposes.

There are several methods used in business valuations, but the three most common approaches under International Valuation Standards are:

1. Income Approach
   This method estimates the present value of future expected cash flows generated by the business. The income approach is based on the principle that the value of a business is equal to the present value of its expected future cash flows. The most common income approach methods are the discounted cash flow method and the capitalisation of earnings method.
2. Market Approach
   This method compares the company to similar businesses that have recently been sold or are publicly traded. The market approach is based on the principle that the value of a business is related to the prices of similar businesses. The most common market approach method is the comparable transactions method.
3. Cost Approach
   This method provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk or other factors are involved. The approach provides an indication of value by calculating the current replacement or reproduction cost of an asset and making deductions for physical deterioration and all other relevant forms of obsolescence. The most common cost approach methods are the replacement cost method and the summation method.

It is important to note that the choice of method used in a business valuation will depend on the circumstances of the specific business being valued. In addition, there are various factors to consider, such as the industry, the economic environment, and the company's historical performance.

Undertaking a business valuation can be a complex and time-consuming process. It often involves analysing financial statements, industry trends, market data, and other relevant information. It is imperative when undertaking a business valuation that an expert valuation specialist is consulted to ensure your valuation is in line with International Valuation Standards and appropriate for the purpose that the valuation is being undertaken.

Find Out More

Groves & Partners are expert valuation advisors, with significant experience in undertaking business valuations for a wide range of purposes. To find out more about our valuation services please phone us on 1300 892 717 (+61 2 7208 7970) or email info@groves.com.au.