BUSINESS VALUATIONS

Business Valuations are used to:

•   Determine the fair market value of a business.

•   Submit to lenders to secure financing.

•   Attract a financial partner.

•   Estate planning.

•   Business litigation.
   

To determine the fair market value of a business, a Business Valuation should be prepared. A Business Valuation is an estimate of business’ value, the suggested sales price, based on standard formulas and historical information of similar businesses. A business Valuation will help to reinforce the asking price and allow the Seller to better understand how a potential Buyer may look at the business.

The fair market value of a business is defined as the cash or cash equivalent at which a business would change hands between a willing reasonable Buyer and a willing reasonable Seller in a reasonable amount of time. This assumes that neither the Buyer nor the Seller is under any compulsion (irrational motive) to buy or sell and both have a reasonable knowledge of the relevant facts. It is when the motive to sell is the same as the motivation to buy for the same price.

A business valuation should not be confused with a business appraisal. A Business Appraisal generally refers to an in-depth, detail report that complies with the provisions as set forth by the Uniform Standards of Professional Appraisal Practices. An appraisal company generally uses several approaches in determining the value such as, the Discounted Future Earnings Method, Capitalization of Normalized Earnings Method, Private Transaction Comparable Method, Publicly Traded Multiples as well as other approaches.

Regardless what valuation approach is used, for a privately held small businesses valued less than $500,000 (which comprises about 90% of all the businesses), a reasonable selling price for the business can usually be determined by adding the asset value of the business to a multiple of the owner’s annual cash benefit including the value of the perks. The multiplier generally ranges from six months to two or three years of financial benefits.

Larger businesses with more predictable future earnings, especially if they have a strong position in the industry may be able to use a multiplier of four and even five years of financial benefits. Those businesses tend to have more of its own identity which perpetuates the business as opposed to being driven primarily by the owner/operator. This multiplier is influenced by the value assigned to the various items listed in the Elements of an Established Business.

Depending upon the level of detail needed and the purpose of the report, Capitol Business Consultants may use an outside professional firm to prepare the valuation.