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What are the processes and methods of business appraisal or Business Valuation?

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The past financial history of a business is not sufficient in and of itself in order to adequately estimate the true and complete value of a business. This is the case because past financial statements often leave out critical and crucial information that can greatly increase or decrease a company’s value, such as intangible asset value (beneficial contracts, below market operating costs, copyrights, agreements that are both, franchise and proprietary, etc.).

Therefore, when a company is appraised the past financial history of operation is incorporated in order to forecast future gains throughout a much larger and more intricate method of valuation.
The three most popular methods to Business Valuation are as follows:

The Asset Method:

The asset method uses appraisal approaches that entail a thorough and detailed review of the individual assets of the company. Usually in this method, all resources and liabilities are adjusted to a standard of value, like fair market value.
The major weakness of this method is that intangible assets are most often immeasurable. In most cases the asset method is used in conjunction with another method that can help take into consideration all the various resources and items that the asset method might miss or disregard.

The Market Method:

The market method uses businesses that operate in a same or similar industry in order to develop valuation guidelines that can then be used to determine the specific value for the said company.
Several approaches are often taken under the umbrella of the market method, such as private company sales values, public companies price of stock at the specific time of valuation for similar companies in the public sphere.

The Earnings Method:

The earnings method functions as a combination of two other possible approaches: actual income approach and a discounted income approach. These two approaches are not concern with one another as each have different interests regarding business valuation.
The future earnings and overall income of the company is the differing aspect of each approach. Therefore, all earnings are counterbalanced by all possible risks present in the company’s operation.

As is noticeable, some approaches exist primarily to give a fast, fairly common value estimation of a business. Often these methods are commonly called rules of thumb.
Rules of thumb usually provide a variety of values—often a wide array of potential estimations. Because of this, rules of thumb should only be utilized as a check against another method instead of a method of appraisal in and of itself.

Next Page: What is the difference between Fair Value and Market Price?

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