Economic models related to assets, income, benefits and overall market determine the value of a small business, notes the Houston Chronicle. Public companies have a valuation derived from stock price, but private companies and small businesses require a more advanced analysis.
The asset-based valuation considers the tangible assets of a company. Specific tangible assets include inventory and equipment. In most cases, retail and manufacturing companies rely on an asset-based valuation. The formula for this valuation takes into account the fair market value of fixed assets and adds the value of any improvements in addition to the wholesale value of inventory.
The income approach factors the profit potential of a company. Companies without substantial inventory or tangible assets utilize this method. Examples of companies include service or consulting groups. Cash flow and capitalization rate are some of the relevant metrics. The benefit valuation is the least complex, as it considers the tangible benefit the business generates for its principal owner with regards to cash flow. A multiplier, which accounts for the standard return on investment, applies as well.
Finally, the market valuation is the most reliable, as it utilizes industry standard sales figures or comparable sales. The approach considers competitors and other players within the industry and multiplies the earnings by a relevant multiplier. These multipliers fluctuate, and the industry publishes updates to the values regularly.