Online Money Manager

Business valuation is an art and not a science, because valuation methods involve subjective judgements of what a business might be worth on the day of valuation, or at some time in the future. From the seller’s point of view, the most important valuation opinion is that of a potential purchaser, and no book or article on business valuation is complete without the old chestnut that a business is only worth what a buyer is prepared to pay on the date the seller wishes to sell.

Whatever valuation method is adopted to value a business, it is important for owners to recognise that the valuation should be based on objective criteria (such as are used for the valuation of other investments) and not on subject criteria (including how hard you might have worked on the business to build it up!).

Generally speaking, all accepted business valuation methods place a value on a business by capitalising its expected future profits, or cash flows. However, this approach can be compromised by the fact that the value of the whole business arrived at through these methods can be less than the value of the business’s assets based on their market value, or their value in the business’s balance sheet.

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