Tools and Techniques of Business Valuation

Abstract

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes. An attempt has been made in this article to provide knowledge regarding the various tools and techniques that are used in the valuation of a business, starting with simple financial statements and the use of ratios, and going on to discounted free cash flow and option-based methods.