Gold Magazine September - October 2013, Issue 30 | Page 75

The Asset Approach

The Asset Approach views the business as
a set of assets and liabilities that are used as
building blocks to construct the picture of
business value. The asset approach is based
on the so-called “principle of substitution”
which addresses the question: What will it
cost to create another business like this one,
which will produce the same economic
benefits for its owners? Since every operating business has assets and liabilities, a
natural way of addressing this question is
to determine the value of these assets and
liabilities. The difference between them is
the business value. This may sound simple
enough but the challenge is in the details:
figuring out what assets and liabilities to
include in the valuation, choosing a standard of measurement and then actually
determining what each asset and liability
is worth. For example, many business balance sheets may not include their most important assets such as internally developed
products and proprietary ways of doing
business. If the business owner hasn’t paid
for them, they won’t have been recorded on
the “cost-basis” balance sheet!

The Market Approach

The Market Approach, as the name implies, relies on signs from the real market
place to determine what a business is
worth. Here, the so-called “principle of
competition” applies and the question is:
What are other businesses worth that are
similar to my business? No business operates in a vacuum. If what you do is really
great, the chances are that are others doing
the same or similar things. If you are looking to buy a business, you should decide
what type of business you are interested in
and then look around to see what the “going rate” is for businesses of this type. If
you are planning to sell your business, you
will check the market to see what similar
businesses are selling for. It is intuitive to
think that “the market” will settle on some
idea of business price equilibrium – something that a buyer will be willing to pay
and a seller willing to accept. That’s what is
known as the fair market value. Both parties are assumed to act in full knowledge

of all the relevant facts, with neither being
forced to conclude the sale.

The Income Approach

The Income Approach takes a look at the
core reason for running a business – making money. Here the so-called “principle
of expectation” applies and I need to ask
myself: If I invest time, money and effort
in business ownership, what economic
benefits will it bring me and when? Notice
the future expectation of economic benefit.
Since the money is not in the bank yet,
there is some measure of risk – of not receiving all or part of it when you expect it.
So, in addition to figuring out what kind
of money the business is likely to bring, the
income valuation approach also factors in
the risk. Since the business value must be
established in the present, the expected income and risk mu