Valuation consulting is performed on businesses of all sizes for many reasons.  No matter what the purpose of a business valuation is, there are a few important factors that are always considered by an appraiser when determining the true value of a business.

There are three different approaches that a business appraiser takes into account.  The first is the income approach, for which the appraiser must determine the expected profits and values in the future of the business.  They must look at a multi-period discounted future income or a capitalization period to determine this.  The second approach is the market approach, which is where the appraiser will compare the business in question to other businesses of its kind that have been sold in the past.  An appraiser can choose two methods to do this- the publicly traded company method or the direct market data method.  The third approach that an appraiser takes into account is the asset approach.  This is where a company’s assets are evaluated and the intangible assets and contingent liabilities are also considered.

There are also a few discounts that may be applied in valuation consulting.  These discounts are things like a discount for lack of voting rights, key person discount, discount for lack of control, portfolio discount, blockage discount and more.  Discounts for lack of control and lack of marketability are usually the most common discounts that need to be applied in valuations.

Typically the standard of value that an appraiser will hold a business to is the investment value or the fair market value.  Investment value refers to the value a particular investor would see based on individual investment expectations and requirements.  This is usually applied in cases when an acquirer is assessing the value of a target company.  Fair market value is a more common standard of value and refers to the cash value if the property were to be bought by someone without any problems.  It helps in these cases when both the buyer and the seller both have knowledge of the industry.

Valuation consulting is a necessary process for many businesses during many different business transactions.  Knowing these important factors that are considered can help you prepare for the process.  It’s good to know what an appraiser is going to be considering so you’re not completely lost when you need a business valuation.