The National Directory of Certified Public Accountants

Ask A CPA - Buying & Selling a Business

Within The Many Business Valuation Methods , What Is The Income Approach ?

Valuing a business is a tricky process with the end result being to ascertain the fair market value of the business. Fair market value is the amount at which the property would change hands between the buyer and seller when neither are under compulsion to buy and when both have reasonable knowledge of relevant facts concerning the business. The income approach is generally used when valuing small closely held businesses. When using this approach, you can determine the value of a business using one or more methods where you convert the anticipated benefits of owning the business. To find the fair market value under the income approach, divide the after tax value by the capitalization rate,(capitalization rate is the Net operating Income divided by the purchase price expressed as a percentage). Speak to your local CPA or business broker for more information about valuing a business and on your pending purchase or sale.

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