The Income Approach to Business Valuation
Getting the correct business valuation is an important process to go through, whether you are wanting to sell, buy or get a loan. The best way to approach it is to look at the different valuing factors that are taking into account. One of these is the income approach to business valuation.
There are three main approaches to valuing a business, income, market and asset. It is necessary to understand how all of these play into the overall business valuation process. Firstly, you will need to understand why getting a business valuation is so important in this day and age. Whether you are looking to buy or sell, you need to know what the business it worth. This knowledge will provide you with options on how to go about making the necessary changes or taking the first steps towards becoming a business owner. You will soon find out whether or not your business is faring well and if it is competing with the other businesses around it. This is where the market approach comes in, the market approach will look into how other businesses are doing on the market that are similar to yours. By understanding how much businesses are worth around you, you will be able to make a calculated decision on how well you are doing, whether or not your should sell or continuing to make your business a success.
Once you understand the market value, you can than look at the income approach to business valuation. Basically, it does what it says and looks at the income you are generating from your company. The whole reason for owning and running a company is to make money, if you are not making money than you are probably doing something wrong. There are two ways in which the income approach operates, it will firstly look at what type of money the business is likely to bring, i.e. how much money your business can realistically make. The next aspect that will be taken into consideration is the risk, what if your business does not bring in any income whatsoever? This is done by approaching the income via capitalization and discounting:
· Capitalization will divide the businesses expected earnings by the capitalization rate. This basically means that the business value is defined by its earning and the rate is used to relate the two. In turn this will help to give you an accurate value of your business at the present moment in time.
· Discounting looks into how much income you predict your company will make over a period of time. It will than look into what will happen if your company does not in fact make that income. Than you will work out how much your business will be worth at the end of this period which will give you the present value of your business.