3 Common Business Valuation Methods
There are many reasons to obtain a business valuation and have it kept up-to-date periodically.
You may need to:
sell the business now or in the future
obtain debt or equity financing for expansion
buy-out a shareholder or spouse
determine the value for estate planning
Regardless of the reason, and there can be many others how much your business is worth depends on various factors, from the company’s tangible and intangible asset base (including goodwill) and the company’s ability to generate consistent cash flow in both good and bad economic times. And of course the level of activity in the market place which is dictated by the general state of the economy.
Get It Done Right!
I read this quote once and its so true “I do not believe that business owners should do their own business valuation. This is too much like asking a mother how talented her child is”.
Neither the mother nor the business owner has the necessary distance or the objectivity.
To ensure that you set and receive the fairest price when you're selling or financing a transaction, get a business valuation done by a professional Business Valuator.
A Business Valuator will use a variety of business valuation methods to determine a fair price for your business, here are 3 common methods (simplified):
1. Asset Based Method
Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
For companies that are a going concern businesses this approach is only appropriate where no commercial goodwill exists such as doctor, hairstylist or an investment holding company. A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off and taxes paid.
2. Earnings Based Method
Earnings based methods are predicated on the idea that a business's true value lies in its ability to generate cash flow. There are several variations such as capitalized earnings approach, capitalized cash flow approach and discounted cash flow approach.
These methods seek to arrive at a business value by applying a multiple or capitalization rate to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The capitalization rate can vary substantially, depending upon the industry, economy, and the outlook for the business and its risk factors.
3. Market Based Method
Compares the business to recent sales of similar comparable companies.
Although the Earning Value Approach is the most popular business valuation method, for most businesses, some combination of business valuation methods will be the fairest way to set a selling price.
If you would like to discuss an early valuation or strategies to maximize your business value, please give us a call or send us an e-mail. The initial consultation is always free!
Malahat Valuation Group