3 Common Methods of Business Valuation
- Asset-Based Valuation
- Market Comparison Valuation
- Discount Cash Flow Valuation
The asset based approach considers the value of a business to be equal to the sum of its parts and does not consider the future cash flow of the business. It is only effective in quantifying the fair market value of a business’s tangible assets. Goodwill and cash generation is not considered
Market Comparison Valuation
This valuation model takes into account available information of similar businesses including recent transactions and financial metrics. For a market comparison to be effective, a selected list of comparable companies are reviewed in order to find a multiplier that has the least variation amongst the sample businesses. The multiplier always include a valuation metric like Enterprise Value (EV) and a Financial Metric like EBIT or EBITDA. Your Multipler will usually be a fraction like EBIT/EV or EBITDA/EV.
Discount Cash Flow Valuation
The Discounted Cash Flow (DCF) model considers the future cash flow of a business and discounts that cash flow into its present value. Usually 5 years of projected financials are discounted and added to a perpetuity model in order to determine a businesses enterprise value. DCF is the preferred method of valuation and can help determine the stock price. This model includes the Capital Asset Pricing Model as well as the weight average cost of capital.