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Business Valuation Approaches

There are three fundamental ways to measure what a business is worth:

  • Income Appraoch
  • Market Approach
  • Cost or Asset Approach

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 Income Approach

The Income Approach focuses on the expected future benefits from investing in the business.  This method can account for variable growth, capital expenditures, financing decisions and working capital needs.  Historical data is used to create cash flow projections, which are converted into a single present value amount by utilizing a rate of return that an investor would require for assuming the risk associated with an investment in the company.

 Market Approach

The market approach involves the application of pricing multiples based on similar transactions in the marketplace. The most common pricing multiples are P/E, as well as Revenue and Earnings multiples. At Allied Business Group, we perform research to identify similar closely held businesses that recently sold in the marketplace to derive pricing multiples.  In applying these pricing multiples to the business, adjustments are often made to account for differences in investment characteristics, such as growth potential and relative risk.

 Cost or Asset Approach

This approach entails a restatement of the balance sheet by replacing the book value of assets and liabilities with their respective fair market values. This approach is frequently used in valuing holding companies or businesses that are significantly under-performing. It is often an inappropriate valuation approach for companies having significant intangible value. However, a cost approach may also be used to establish a floor value for a business using a liquidation method.

        

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Kansas City Office:

Allied Business Group, Inc.

4800 College Boulevard
Leawood, Kansas 66211

Phone: 913-897-3599

Fax: 1-888-857-0169

www.AlliedBizGroup.com

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