Income method of business valuation

How to determine profitability of the business? The method of its determination may be twofold. First, the so-called “profitable” business valuation method that takes into account only the amount of profit as such. The method is the simplest, but alas, as far from the truth, as the weather forecast, which appears only air temperature. Second, the method is complex, considering the profit in the context of expenditure items, taking into account the time factor, as well as other “pros” and “cons” of a particular business. A very good example to illustrate the two methods of evaluation is a business with massage chairs.

Income method of business valuation frank and direct as a child. “Revenue – then return,” he says, and makes a “sentence”: a monthly profit of one massage chair installed in the right place – 15 000 rubles. This estimate does not deny the logic, only the meaning and the information in it is no more than the expression “oil – the oil.” And the entrepreneur to decide just need comprehensive information, because his decision depends on the success of future business. Learn more about Company in Russia.

Such comprehensive information lucrative business valuation method does not. But, it provides a comprehensive method that considers the amount of profits, together with the initial investment, overhead costs, as well as a number of circumstances of intangible property. And then besides the figures “15,000 rubles” in the analysis there are other numbers, namely, the cost of a massage chair – 54000 rubles and the payback period of this amount – 5-6 months. In addition, when this assessment takes into account the novelty business with massage chairs, aborted this market, the almost complete absence of competition in it, and the prospects that are connected with it. That is, the information that income approach valuation of the business is neglected, considering it “little things in life.” Obviously, the results of both methods are likely to be, different decisions.

This example clearly shows the importance of an integrated, comprehensive approach in assessing the profitability of the business and its prospects. Unfortunately, the income approach valuation of the business is still very common among those who plan to start their own business activity and chooses to do so. Wrong decisions in business is also usually measured very specific amounts only, alas, with a negative sign.