To determine the total worth or value of the business, there are total of three approaches which could be followed. Each one of these have its own features and things to consider and are discussed briefly as follows:
Asset based business valuation approach:
This approach calculates all the assets of the company which includes the investments as well and there are two ways to calculate company’s assets. One is the going concern in which the book value of the company is calculated from the balance sheets records which is the difference of the total liabilities and the total assets. The second is the liquidation in which the total assets current market values are analysed given all the liabilities have been cleared of.
Earning value business approach:
This kind of the approach is also known as the income-based approach in which it is determined that the current value of any business is dependent on the amount of income generated by the business in the future. There are also couple of formulas to calculate the company value through this approach. First is the capitalization which is done on the past earning, in this method the company history is used to determine what were the cash flows and then this is calculated using the capitalizing factor which indicates the risk involved in the future expected income. The second method is the discounted future incomes, this is the method which utilize future predicted incomes using the division with the factor of capitalization.
Market business valuation approach:
This is the technique in which you compare your company and your business plan in Melbourne to the companies in the market which have been sold. Although this method has limitations because it will only work when there is enough amount of the businesses like you in the market.
What to consider in these approaches if you are the sole owner:
In such case, the first approach is difficult because the assets of the company belong to the owner and it becomes a difficult task to sperate the company’s asset from the personal assets of the owner. Similarly, the second and third approaches become complex as well in such cases.
The best way to perform the right business valuation is always using the combination of above approaches. The earning value approach is the one which is followed by most of the businesses but it is recommended that you always hire the business valuers and let them do this task. Based on their experience they will use the technique which is suitable for you and will be best to find the right worth of your business.