How to define the economic value of a business

Economic Value
Written by Bobby Jan for Gaebler Ventures

If you are looking to buy a business, it is important to understand how to define the economic value of a business. By looking at how much the business is worth through various business valuation lenses, you can determine what price you might be willing to offer.

If you are looking to business, it is important to determine the value of the business.
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Value comes in many different forms.

Some people buy certain businesses to increase their social standing while other run businesses as a hobby. Most entrepreneurs, however, are concerned with the economic value of a business.

There are many subtypes of economic value. This article will introduce some of them.

Book Value

The book value is the value of a business or a portion of a business that is stated in financial statements and accounting records. This value is often lower than the market value of a business due to tax considerations.

Fair Market Value or Market Value

Market Value often defined as the price the owner is willing to accept and that the buyer is willing to pay. There are many methods for determining the market value of a business. The most commonly used method is the discounted cash flow methods.

Going Concern Value

Going concern value is the value of the business as a whole and not the sum of its parts.

Goodwill Value

Goodwill includes:

The value of a business that is in excess of the total capital invested in the business.
The intangible assets of a business such as its brand name. For example, the Coca-cola brand name is worth billions.

Replacement Value

The replacement value of a business is determined by how much it will cost to replace the assets of a business.

Liquidation Value

The liquidation value is the net proceeds from selling a business. It is important, however, to take into account how the business will be liquidated. Namely, how much time does the business owner have to sell the business?

Cheng Ming (Bobby) Jan is an Economics major at the University of Chicago who has a strong interest in entrepreneurship and investing.

http://www.gaebler.com/Three-Principles-of-Business-Valuation.htm