Traditional Method of Business Valuations

A traditional business valuation is done using up to three different valuation methods.

The first method is the Discounted Cash Flow model. This method projects the firm’s cash flows into the future and then discounts them back to the present at an appropriate discount rate to determine a present value for the firm.

The second model, the Asset Approach, involves examining the assets of a firm and attempting to assess the cost of replacing all of those assets. The total cost of the replacement would be the value of the firm. This has to be adjusted to recognize the proper amount of good will or value add which requires some form of validation model for the Soft Assets.

The third method, the Comparable Firm Approach, involves searching historical records to find similar firms that have been sold in the past. Using this historical information, an estimate of the value of the subject firm is derived.

A professional Business Valuation will determine the firm’s value using a number of models including these three methods and then combine them to determine an appropriate range of value for the firm.

View the Problems with the Standard Approach of Business Valuation.