There are three principal
techniques for valuing a business:
Asset method. How much was
paid, or would be paid, for the assets of the business?
Book value is an accounting measure of historic value;
liquidation value focuses on a market measure of assets.
Income method. What is the present
value of the estimated future returns from the business?
Discounting cash flows or capitalizing earnings are
Market method. What do others pay
for similar assets or returns? Valuations of comparable
businesses can be used to extrapolate the value our
Of course, that is not the whole story. After determining
the overall value of the business, adjustments
are often appropriate to reflect the value of control
and liquidity rights -- or the lack of these rights.
Finally, no valuation is perfect, but it is always wise
to check for some common
and avoidable errors.