Asset-Based Valuation Method
The asset-based valuation method uses a company's total assets to come up with a valuation. It has two similar approaches you can use:
- Going concern asset-based approach
- Liquidation asset-based approach
The going concern method is also called the book value method, and it's simple enough to remember: You look at your company's books to calculate its value. You subtract your company's total liabilities, like debts, from your total assets. Your balance sheet should be able to give you the current numbers. Assets can be tangible, like inventory or real estate, or intangible, like patents or marketing lists. Other methods on this list don't include intangible assets, so this valuation may come out higher than when using other approaches.
Similarly, the liquidation approach figures out how much cash would be left once the company sold off all its assets and paid off its debts.
Market Value Approach
The market value approach compares recently sold businesses like yours to calculate your fair market value. However, you'll need a decent number of competitors for this method to work for your company. This approach is not the best for sole proprietors. It can be hard to access the necessary data since sole proprietors are usually solo operations. Additionally, the market value approach is more like an estimate, so it's good to include another method as well.
Earning Value Approach
With the earning value approach, you look atthe business'sfuture earning potential. You can do this by capitalizing earnings, which involves looking back at past earnings to determine what your company can expect to make in the future.Then, you divide that income by the capitalization rate, or the "cap rate," which gives you the expected future value of your company. This method can be more difficult for sole proprietors if a business sells, as well, since it's hard to say how many customers would leave if the business changed hands. Therefore, there might be an outsized loss of earnings during a transition.
Discounted Cash Flow Valuation Method
Also called the income approach, the discounted cash flow (DCF) valuation method uses predictions of future cash flows. The first step is discounting cash flow, which means you apply a discount rate that calculates the current value to cash flows to see how much they would be worth in today's dollars.
This approach is great for companies with variable future income. You can use ourbusiness valuation calculatorthat utilizes the DCF method to find your company's worth quickly.
ROI-Based Valuation Method
The ROI-based valuation method is one of the most popular valuation strategies and can be effective for companies of many different sizes. This valuation method should be familiar to anyone who has seen the TV showShark Tank.It is most often used when seeking investors or purchasing assets. ROI means return on investment, and it tells you how much of a return you'll get in exchange for investing in a company. In other words, how much money you'll make once the company sells.
Find the ROI by first calculating your net profits, then dividing your profits by your costs. For example, if you have $100,000 in net profits and $500,000 in costs, your ROI would be 20%.
