There is no one correct way to value a business. Facts and circumstances affect valuation, and it wouldn't be unusual that an agreed-upon value is the result of combining several or more methods.
Book value, typically calculated as assets less liabilities, is one of the simplest methods. In most cases, simple book value must be adjusted to more appropriately reflect fair market value.
Valuation by means of a formula can take many variations. The factors that the IRS considers will be incorporated into various formulas. Two frequently used formulas are:
- Appraised Future Cash Flow This method looks at the present value of anticipated future income or cash flow generated by the business. In effect, the valuator capitalizes the company's current earnings.
- Capitalization fo Earnings capitalization of earnings method is well-suited for valuing a company whose earnings can be reasonably predicted - constant earnings, growing earnings, or intermediate-term growth followed by constant earnings.
Appraised value is accomplished through a third party. This is the most expensive way to establish the value of a business. If an appraiser is hired, the appraiser should be certified.
Business Owner's Estimate
The agreed upon value is just that. It is the owner's best estimate of what the business is currently worth.