David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, fraud deterrence programs and forensic accounting services in Philadelphia and the Delaware Valley.
The three most commonly used approaches to valuing a business are: The Income Approach, the Asset-based Approach, and the Market Approach.
Professional business valuators are required to consider all three approaches. In the end, a business valuation expert must use his or her judgment to determine the best approach or combination of approaches to arrive at a business valuation that is as fair and accurate as possible.
These three most common approaches which a business valuation expert will consider are:
- The Income Approach, which values a business by using one or more methods to convert anticipated economic benefits (earnings or cash flow) into a single present amount. There are two primary methods under this approach:
- Capitalization of Earnings/Cash Flows Method, which is used when there has been a steady level of historical growth; and the
- Discounted Earnings/Cash Flow Method, which is used when there have been fluctuations in historical growth and when the company can reasonably project earnings for the next five or more years.
- The Asset-based Approach, which values a business by calculating the value of net assets, (the difference between total assets and total liabilities). There also are two primary methods under this approach:
- The Book Value Method, which calculates the net asset value as shown on the books of the business – typically at historical cost, and the
- Adjusted Net Asset Method, which adjusts the value of assets and liabilities of the fair market value as of the valuation date.
- The Market Approach, which values a business by comparing it to sales of similar businesses. There are four primary methods under the Market Approach:
- Transactions of comparable publicly held companies;
- Transactions of comparable privately held companies;
- Prior transactions involving shares of the company itself, and lastly,
- The ability of the company to pay shareholder dividends as compared to dividends paid by comparable companies.
The specific methods used depend on the facts and circumstances surrounding the business being valued. For example, if there are no comparable market transactions or an insufficient number to be meaningful, the Market Approach may not be useful.
Once the value of the business has been set under each of the approaches, the business valuation expert must determine whether one of the values is the best representation of the true value of the business or if a weighted blend of the values provides a more accurate final business value, he said.
Typically, the Asset-based Approach yields the lowest value, and is usually relied upon by the valuator to establish a floor value for the business. However, if the business has had recent operating losses and no comparable market transactions are available, the Asset-based Approach may well be the basis for the valuation.
If the valuation expert is valuing a startup business with little or no operating history and/or profitability, the Income Approach might yield a very low value. However, the Market Approach might result in a considerably higher value based on the sale of comparable businesses.
Under this scenario, some valuators would select the Market Approach as being most indicative of value and others might choose a blend of the Income Approach and Market Approach with a higher weight on the Market Approach.
It all comes down to the professional judgment of the business valuator, based on his or her experience and knowledge about the business being valued.
If you need a business valuation professional in Philadelphia, or if you require any other services of a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at firstname.lastname@example.org.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.