There are three fundamental approaches used to value a business:
Asset approach: In this approach, the business is considered a set of assets and liabilities. There are two ways in this approach. The first one is going concern asset-based approach, in which the evaluator subtracts the total liabilities from total assets to get the business value. The second one is the liquidation asset-based approach, which determines the net cash amount that would remain if all the assets are sold, and liabilities are paid off.
Earning value approach: In this approach, the business value is nothing but its ability to produce wealth in the future. There are two ways in this approach. The first one is the capitalization valuation method, where past earnings are normalized to account for unusual revenue or expenses, which is then multiplied by a capitalization factor. The other is the discounted method, in which an average of predicted future earnings is divided by the capitalization factor.
Market value approach: In this approach, the evaluator looks for signs from the real market place to find out the worth of the business by comparing it with a similar company or transaction.