Business Valuation Methods

Business Valuation Methods - David Hufnagel Informational...

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David Hufnagel Informational Report 3/06/2008 Introduction Company Valuation Methods: A Definition This report will cover how business valuation methods determine the monetary worth of a business. The report first shows methods that use year-end balance sheet data, with one in particular adding a popular valuation tool that emphasizes the increased value of current cash over future cash flow. Calculation heavy equations and advanced market factors are minimized in favor of methods suited for valuating smaller markets. A simple yet effective valuation method for large public companies is provided, along with difficulties that exist within valuating certain corporations. The report describes the process used to place a potential value on a business and aims for a better understanding of a projected loss or gain in value. This report will not discuss all aspects of valuation methods, but rather explain the general process of valuation and the main components. The methods described are tailored for providing a starting point for the reported 72 percent of Americans that dream of owning their own business. The final page includes Table 1, showing a real-life example of the discussed components. In the conclusion, the report will analyze the potential effects of negligent valuation and possible causes of error. Analysis Asset Approach The first and simplest approach shown is the asset approach. Also known as the cost approach this method values a company by accumulating the costs that would currently be required to replace the asset. The premise of the asset approach is that an investor would pay no more to purchase an asset than they could pay to reproduce the asset. The assets of the business include tools, machinery, offices, warehouses, bank accounts, cash, and other material goods able to liquidate into cash flow. Small service-based companies typically use this method, due to cash flow generating almost solely from the
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direct use of their assets. Sometimes it is complicated to get reliable results from factors like inflation and rapid technological changes. Some small companies having poor accounting records, making it difficult to account for necessary cash flows. The methods tendency of ignoring the value of logos and trademarks related to the true worth shows a preference towards smaller companies. Cash Flow Method
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Business Valuation Methods - David Hufnagel Informational...

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