Business valuation is as much an art as it is a science. One needs to take both into account in relation to the circumstance because at the end of the day it comes down to basic supply and demand dynamics. For example, the value of an umbrella in the rain is worth more than on a sunny day at the beach.

The most logical approach to valuing a business is to add up the value of all its assets. This would include the value of the land, building, machinery, and any other tangible assets. This can be considered the asset value. Often times, many experts deduct the liabilities of the business, such as payables and loans. In this case, the resulting net asset value represents the current book value. Another way to look at it is that assets minus liabilities equals shareholder. ‘s equity.

The net asset value approach calculates a static value of the company, but this does not take into account the potential value of future earnings. In order to do this, the first step is to make assumptions regarding future revenues, expenses, and liabilities. For example, a recently procured loan for the purpose of building a new manufacturing plant has a certain return on investment. The new plant would be worth more than just the land, building, and machinery. Its worth would also include the plant’s future earnings potential. This needs to be included in a company’s valuation.

However, in calculating the value of future earnings one should consider three types of outcomes: base case, aggressive, and conservative. The result is a range of values that provides a basis for negotiations. Furthermore, it ensures that the seller receives a fair value.

In generating the estimate, one also need to account for the time value of money. This is important because monies are impacted by interest payments and inflation over time. For example, a dollar put in the bank today accrues interest over a year. If one puts $1. 00 into a bank account at 5% interest rate, then in one year the value of the account would grow to $1. 05 in one year. Similarly, one dollar a year from now is worth slightly more then $0. 95 today. As a result, one needs to discount future values when trying determine the present value.

Intangible assets also need to be accounted for when conducting valuations. Intangible assets are assets such as patents, brand equity, goodwill, etc. These types of assets are harder to quantify than a piece of machinery or land because there are readily available market comparisons. This is where the art aspect to valuations plays a role.

Clearly, business valuations are more than just a sum of the parts. Depending on the business being valued, there are often times a host of variable that need to be accounted for. Furthermore, consideration should also be given to opportunity costs before arriving at a final decision.

Business valuations and forensic accounting services are niche services available at finance firms. If you need to know more about business valuation, why not visit the BTG website that details on how it is done and who might need it.