A business valuation captures the value of a business at a particular point in time, for a particular purpose. This value represents the present value of the future benefits that the owner(s) can expect to receive. The perspectives that determine the parameters of a valuation are referred to as the standard of value and the purpose of the value. Based on these perspectives, the same business can have different values. For example, as of the same date, a business can have a different value for estate tax reporting, the sale to a consolidator and for equitable distribution in a divorce.
Price should be differentiated from value. Price is a negotiated amount between two parties for a specific transaction. The parties to the transaction may have different requirements of the transaction, influencing them to act.
The valuation approaches are the general ways of determining a value indication for a subject interest by applying one or more valuation methods. The three traditional valuation approaches are the assets approach, the income approach and the market approach. The valuation process involves the evaluation and consideration a number of factors including basic to most engagements: the nature of the business, its history, the economic environment, the industry outlook as it affects the business, its financial condition, earning and dividend paying capacities, and any goodwill or intangible assets of the business. As part of the process it is also necessary to consider prior sales of interests in the business, as well as the size of the interest and market data available. While these factors were first outlined in Revenue Ruling 59-60, they have become generally accepted as items to be considered in valuation analysis.
Find out more about the three types of valuation approaches:
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