One of the approaches business valuation companies will consider when providing a valuation of a company is the "Income Approach".
The income approach considers historical income, future revenues of a company, the earning potential and also capital requirements, or how much will be needed to invest in the building and equipment to support future revenue growth.
There are a couple of ways to look at the potential income of a company. One business valuation method which falls under the Income approach is the discounted net cash flow or DCF method. This method involves projecting the revenues, cost of goods sold, operating expenses, depreciation, working capital and taxes for five to ten years into the future.
The next step is to discount this future revenue stream to the present, which most of you will recognize as a present value calculation. The discount rate is derived from several methods such as the build up model or CAPM for example. The business valuation expert will also have to take into consideration whether this is a control or minority interest and make an adjustment with a control premium or a discount for lack of control. These are business valuation terms...which we discuss in more detail in other videos.
There can also be situations where there are liquidity or marketability issues for stock in closely held businesses. There are discounts for lack of marketability to cover these issues. As you can see there are many steps to consider when valuing a company from the income approach, but at least now you know enough to be dangerous.
If you would like more information on business valuations, methods to value a company or how to find reputable business valuation companies in Chicago, New York or St. Louis call us at 314-541-8163 or you can find additional videos on company valuation issues at http://www.YouTube.com/businessvaluationSTL