There are many reasons one may choose to get a business valuated. Whether it be for tax purposes, because of a divorce, or, of course, because one is looking to sell the business, you’re going to need to contact a certified business valuation analyst. However, whatever the reason you need your business valuated, there are a few different ways a certified valuation analyst might go about it. The two most common ways are asset-based valuation and the earnings multiplier method. You may find it useful to know when it is best to use one or the other.
Asset-based valuation is the most straightforward. With this method, an appraiser will determine the value of a business by adding up anything that’s worth money, including both tangible and intangible assets. While asset-based valuation definitely gives the business owner and/or potential buyer some insight into the business, it doesn’t always provide a clear image of the true worth of a business. This is because asset-based valuation does not include any appraising of the earning potential of a business. For this reason, this form of evaluation is most often used during liquidation or for the sale of defunct companies.
For a thriving business, the earnings multiplier method is recommended as it is what is most commonly used before a business is placed on the open marketplace. With this form of valuation, a buyer can have a better understanding of what kind of return they’ll be getting on their investment. This is because the earnings multiplier method of valuation, unlike asset-based valuation, does take into account earnings potential by multiplying profits by a certain multiple–such as past profits–and using that to determine future earnings of a business, therefore give one a truer sense of its value.
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