It is important to note that there is no definitive valuation methodology for a business, since most models rely upon various subjective assumptions. Whichever valuation model you use or assumptions you make, ultimately the value of the business comes down to what both parties agree it is worth.
Start-up businesses (especially pre-revenue ones) can get very carried away with high business valuations. Think: would someone buy what you have created so far at this valuation? Probably not.
Usually, you will show the valuation of the business as a range, by changing the key assumptions in the model.
There are various models that can be used to value a business. Some of the more popular ones are outlined briefly below.
1. Net asset valuation model
This is the most basic form of valuing an existing business. It looks at the net asset value as shown on the balance sheet, i.e. all assets of the business, less liabilities.
- Comment: The most basic model, but it does not take account of the future earnings capability of the business and its assets.
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