Seven critical business valuation terms you should know
As a business owner, you'll likely need to have your company appraised at some point. Appraisals are essential in the event you decide to sell or merge the business, create or update a buy-sell agreement, or devise or refine your estate plan. A good way to preempt the uncertainties of the appraisal process is to learn some basic valuation terminology. Here are seven terms you should know:
- Fair market value. This is a term you may associate with selling a car, but it applies to businesses (and their respective assets) as well.
- Going concern value. This important valuation term often comes into play with buy-sell agreements and in divorce cases. Going concern value is the estimated worth of a business that's expected to continue operating in the future.
- The asset (or cost) approach. One of three common approaches that appraisers use to value businesses, this approach essentially calculates a company's worth by adding up its assets net of liabilities.
- The income approach. Another one of three common approaches to valuing a business, the income approach derives a company's value from its anticipated economic benefits.
- The market approach. Yet another one of three common approaches to valuing a business, here an appraiser uses one or more methods that compare the subject company to similar businesses, business ownership interests, securities or intangible assets that have been sold.
- Valuation premium. Sometimes, because of certain factors, an appraiser must increase his or her estimate of a company's value to arrive at the appropriate basis or standard of value. The additional amount is commonly referred to as a "premium."
- Valuation discount. In some cases, an appraiser needs to reduce his or her value estimate based on specified circumstances. The reduction amount is commonly referred to as a "discount."
AccountingWEB would like to thank the accounting and consulting firm of Feeley & Driscoll, P.C. for providing thsi information.