How is Valuation determined?

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Business valuation is a blend of art, science and professional appraisers that typically use a combination of a few main approaches to determine a company's fair market value. The final value is mainly influenced by financial performance, market conditions and intangible assets like brand reputation and a diversified customer base. 

• Market Approach: This method is comparable to real estate appraisals, using recent sales data of similar businesses to estimate value. It relies on market multiples, such as the Enterprise Value-to-EBITDA (EV/EBITDA) or Price-to-Earnings (P/E) ratios, from comparable public companies or private transactions to benchmark the target business. This approach reflects current market sentiment and is widely used when sufficient comparable data is available.
• Income Approach: This approach focuses on the business's ability to generate future economic benefits, primarily cash flow or earnings. Key methods include the Discounted Cash Flow (DCF) analysis, which projects future cash flows and discounts them back to their present value and the Capitalization of Earnings method, which is used for businesses with a stable earnings history. These methods are often favored by buyers as they reflect the potential return on investment.
• Asset Approach: This method determines the value based on the net asset value of the business (total assets minus total liabilities). It is often used for asset-heavy companies (like manufacturing or real estate firms) or businesses in financial distress where future earnings are uncertain. The asset approach provides a baseline or bottom-line value for the business.

•  Ultimately, the most appropriate method depends on the nature of the business, the purpose of the valuation and a professional valuation will help to ensure both buyers and sellers reach a fair and informed agreement.