There is usually three basic approaches that are used to enable an individual to value his or her business. These are the market approach, the income approach, and the asset approach. This website will discuss these approaches in order for an individual to be able to determine the worth of his or her business. We begin with the acid approach which is based on the principle of substitution. This is a principle that assumes that no buyer or investor that would pay more for a particular business than the cost to reproduce it right across the street. This is an important approach where there is a check on how the employee and employer treat the clients and the business reputation in the market.
It is always advisable to understand, value, and know the limitations that the asset approach offers. This is an approach that will provide a relative indication offer value for the assets in intensive companies. It can sometimes be used as a liquidation value for the services that are given in a company by both employee and the employer. The work of both market approach and the income approach is capturing the value of the company’s goodwill or the intangible value. This has always been used to value the worth of the business that is service oriented.
The income approach will operate under the assumption that any buyer is willing to pay for the cash flow which the business is set up to produce going forward as of the date of sale. These buyers will buy the cash flow. This is determined by how much the buyers are willing to pay to access the cash flow of the business depending on the risk associated with the buyer it is actually received once one exits the business.
It is a fact that when a business makes a steady and consistent cash flow and growth, the buyer is usually more attracted in paying a lot of money for the cash flow stream which is less risky here. This cannot be seen in a similar business with unstable and unsteady cash-flow and which cannot be reoccur in future periods meaning it is riskier.
The market approach requires a business person to do research on various businesses in the market, compared these businesses, make a comparative data will help him or her to value the business and know how it is doing in the market. There are things such as leverage, assets, liquidity, turnover, revenue, growth, and many more that are used in determining how the business is doing well in the market. This is very important in understanding the transaction and the history of the market and the business and also the prices that are related to various financial metrics of these companies.