Valuation Techniques - Business Entity

Question 1

Identify the three basic approaches to valuing a business.

Answer 1

1. Market approach
2. Income approach
3. Asset approach

Question 2

Describe the Market approach to valuing a business.

Answer 2

The market approach to valuing a business determines the value of a business by comparing it to other entities with highly similar characteristics for which a fair value can be more readily determined

Question 3

Describe the Income approach to valuing a business.

Answer 3

The income approach to valuing a business determines the value of a business by calculating the present value of the expected benefit stream to be generated by the business. This approach may use discounted cash flows, capitalization of earnings, multiple of earnings or other similar approaches that develop a fair value based on income/earnings.

Question 4

Describe the Asset approach to valuing a business.

Answer 4

The asset approach to valuing a business determines the value of a business by adding (summing) the values of the individual asset that comprise the business. The sum of those asset values constitutes the value of the entire business. This approach is particularly appropriate when the business being valued has little or no cash flows and/or earnings, or when the business will not continue as a going concern.