Chiropractic clinics are usually classified under the SIC code 8041 and NAICS 62131. Chiropractic practices make up a sizable part of the large professional health practitioners service industry. In the US there are over 49,300 chiropractors in private practice.

The industry sector generates a total of $7.66B in annual revenues, and employs over 148,000 practitioners and support staff. Yet a typical chiropractic clinic is small business: generating around $200,000 in annual sales with an average staff of 3.

Successful chiropractic practices can be a source of highly stable earnings from the repeat business that arises out of an established and loyal patient base. Such cash cow established practices are a frequent acquisition target.

Recent selling prices of similar chiropractic practices give you a way to estimate the market value of your own practice or one you are interested in acquiring.

Practice valuation using multiples

To estimate the value of a chiropractic clinic, you can use a number of valuation multiples. Derived from recent sales of similar practices. These multiples are ratios that relate the actual selling prices to the practice financial performance. Usually, the following valuation multiples are used to value a practice:

• Selling price to net annual sales
• Price to gross profit
• Price to net income
• Price to EBIT and EBITDA
• Price to total practice assets
• Price to owners’ equity

Using a number of such valuation multiples for accurate practice valuation is a good approach. Each estimate may differ depending on how favorably your specific practice compares to its peers. The result can be a range of values. On the other hand, you can come up with an average of all the practice value estimates together.

Example: using valuation multiples to value a chiropractic clinic

To demonstrate the idea, consider a typical private chiropractic practice with the following financial details:

• Annual net sales: $245,000
• Gross profit: $239,000
• Net income: $45,500
• EBIT: $50,000
• EBITDA: $62,000
• Discretionary earnings (SDE): $110,000
• Total practice assets valued at: $45,000

We next select a set of reasonable valuation multiples and apply them to the financial figures above. The practice value results are then:

Note that the results vary quite a bit. This depends on how our example practice compares to its peers for each financial performance parameter, e.g. practice annual sales receipts versus EBITDA.

Other practice valuation methods to consider

A well conducted chiropractic practice appraisal usually relies on several business valuation methods. Since chiropractic clinics can build up considerable practice goodwill, the Capitalized Excess Earnings valuation method is a frequent choice.

Practice goodwill valuation in divorce cases

This is typical in cases of marital dissolution in those jurisdictions that treat professional practice goodwill as part of the marital estate. You may have to divide the goodwill into the personal and institutional parts based on the case law in your jurisdiction regarding the distribution of goodwill assets.

Direct capitalization methods, e.g. the Multiple of Discretionary Earnings valuation method are another good choice for valuation of privately owned chiropractic practices. This method provides a highly consistent way of calculating the practice value based on its earnings and a set of financial and operational performance factors.

Are you appraising an employment agency or an executive recruitment firm? Here are some vital industry statistics to consider:

Classified under SIC 7361, there are over 36,000 employment agencies of all types and sizes in the US alone. The industry as a whole generates a very impressive $29.9 billion in annual revenues and employs some 448,000.

Yet an average staffing firm is small: with annual gross revenues of around $1,000,000 and a staff of 13. The vast majority of recruitment companies are privately owned.

Business valuation methods for employment agencies

Successful staffing firms with consistent history of above average profitability and steady earnings growth are highly desirable acquisition targets. Recent sales of such companies give you an objective market evidence to estimate your company’s worth.

The usual tools are valuation multiples that relate the actual business selling prices to their financial performance. Typical valuation multiples used for market-based recruitment company valuations are:

• Business enterprise value to gross revenues or net sales.
• Enterprise value to net income, EBIT and EBITDA.
• Business value to total assets and owners equity.

Since the business valuation multiples are derived from similar employment agency sales, your business value estimates can be calculated as a range, from low to high, or a single value such as the median or average.

Example - valuation of an employment agency using multiples

To illustrate how comparable business sales can be used to value a staffing firm, let’s consider a typical business with these financial parameters:

• Annual gross sales: $1,000,000.
• Net income: $45,000.
• EBITDA: $62,350.
• Total business assets: $112,550.
• Owners equity: $55,200.

To estimate the firm’s fair market value, we pick a set of reasonable valuation multiples and calculate the results as follows:

Calculating the goodwill of a recruitment firm

Established professional business services firms, including employment agencies, can create considerable business goodwill. Often, the value of goodwill exceeds the appraised values of the business tangible assets. Consider using the classical Capitalized Excess Earnings method to calculate the value of business goodwill and total business value.

This serves to complement your market-based business valuation and provide additional insights into the value-creating factors in your company.

Income-based valuation of recruitment companies

For smaller owner-operator managed firms, the Multiple of Discretionary Earnings valuation method is an excellent choice. You can calculate your business value as a multple of its earnings and account for a number of key financial and operational performance factors.

For larger staffing businesses looking for outside financing or anticipating substantial changes in earnings going forward, the Discounted Cash Flow method is the preferred technique. Consider using a number of scenarios in your business valuation such as the best case, worst case and base case outcomes.

Each should be associated with a different earnings forecast and risk assessment. The business valuation results you get can be be averaged or used to establish a value range. Both formats are acceptable for formal business appraisal reporting.

Even in a challenging real estate market quite a few specialized construction companies continue to thrive. The secret of success? Here are a few points to ponder:

• Construction firms in a specialized, well-protected niche, tend to weather the storm better.
• Established companies with strong reputation in their market place stay busy even as competitors exit.
• Word of mouth referrals are even more critical to bringing new business when times are tough.

For example, while new construction volume may be down, construction defect restoration work is still needed. Specialist firms that excel at this often find that their services are in high demand. While no one business is truly recession proof, these types of construction companies are recession resistant.

Interestingly, these successful businesses are sought after acquisition targets - both by larger, well-funded competitors and financial buyers who look for a stable income stream. So even if valuations of many other companies in the market may trend lower, such specialist constuction firms hold their value well.

Business valuation methods for specialized construction businesses

Market activity is a very good indicator of a company’s fair market value. Selling prices of similar companies that changed ownership recently offer you a way to estimate what your own firm is worth. Consider using a number of valuation multiples that help you calculate your  business value based on its financial performance, such as revenues, profits, cash flow or business asset base.

Example - valuing a construction defect restoration company using valuation multiples

To demonstrate the method, let’s take a typical construction firm with the following recent financial performance:

• Annual gross revenue: $2,000,000.
• Net sales (less returns and discounts): $1,950,000.
• Gross profit: $950,000.
• Net income: $210,000.
• EBIT: $225,000.
• EBITDA: $230,000.
• Seller’s discretionary cash flow (SDCF): $350,000.
• Furniture, fixtures and equipment (FF&E) assets: $195,000.
• Inventory: $100,000.
• Total business assets: $465,000.
• Owners’ equity: $155,000.

We pick a set of reasonable valuation multiples and calculate the fair market value of this company as follows:

Note that, by convention, the business value above includes all business tangible assets and goodwill. It does not include the cash, accounts receivable, and the business owned real property, if any.

Additional business valuation methods to cross-check your results

To demonstrate the unique value-creating attributes of your construction company, consider using income-based valuation methods. For smaller, owner-operator managed businesses, the Multiple of Discretionary Earnings is a good choice. For larger firms, the Discounted Cash Flow method is typical.

If the company has established itself as a leader in its market, the value of business goodwill can be a large part of total business value. You can measure business goodwill by using the well-known Capitalized Excess Earnings method, also known as the Treasury Method.

Despite the current economic headwinds, many building maintenance service companies with established client contracts continue to thrive. There are some 92,300 such firms in the US alone, classified under the SIC code 7349.

The industry segment contributes an impressive $28B in annual revenues to the economy employing just under 840,000 people. The typical janitorial services company is quite small - generating around $300,000 in gross annual sales with a staff of 9.

Business valuation methods for janitorial service companies

Given the size of the market and the recurring need to clean and maintain office buildings, the janitorial companies tend to be “recession-resistant”.

Companies with stable earnings from long-term commercial contracts are bought and sold regularly. This is very good news: business selling prices and terms from such deals offer you an excellent way to estimate the value of your janitorial service company.

The typical tools are valuation multiples that relate the actual selling prices of similar companies to their financial performance. You can apply these valuation multiples to estimate the value of your company based on its revenues, profits, EBITDA, cash flow, asset base and owners equity.

Example: valuing a building maintenance business using valuation multiples

To demonstrate this market approach to valuing a business, let’s pick a typical private janitorial service company with the following current financials:

• Gross revenue: $300,000.
• Net sales: $290,000.
• Net income: $60,000.
• EBITDA: $75,000.
• Seller’s discretionary cash flow (SDCF): $110,500.
• Furniture, fixtures and equipment (FF&E) assets: 55,000.
• Inventory: $10,000.
• Book value of owners’ equity: $35,000.

To calculate the fair market value of this business, we choose a set of sensible valuation multiples as follows:

Note that this averages to about 0.86 times the business gross revenues.

Other business valuation methods for janitorial service companies

To supplement the market-based valuation and check your results, consider using the Multiple of Discretionary Earnings method. This well-known technique lets you assess business value from a totally different point of view: based on the company’s earning power and 14 key financial and operational performance factors.

Companies with a long history of success in their market may have built up significant business goodwill. As a result, they may be worth well above the value of the business tangible assets. The Treasury Method is a great choice to calculate the value of business goodwill and total value for such firms.

With a global focus on sustainable manufacturing, scrap metal recycling is a key growth industry segment. Classified under the SIC code 5093, there are just under 8,200 metal recycling companies in the US alone. The industry as a whole generates some $21.1B in annual revenues and employs close to 75,600 people.

Yet an average metal recycling firm is quite small - with around $3,000,000 in annual sales and a staff of  9.

Business valuation methods for metal recycling companies

Being in a growth segment usually means there is considerable investor appetite for business acquisitions. Indeed, scrap metal recycling businesses sell quite often.

The recent sales of similar businesses offer you an excellent way to determine you company value. Valuation multiples that relate the actual business selling prices to key financial performance measures are the typical valuation tools.

Using valuation multiples derived from recent recycling business sales, you can develop an accurate estimate of value for firm in this industry segment. The most common valuation multiples used for valuing metal recycling businesses are these:

• Business selling price to business gross revenues or net sales.
• Price to gross profit.
• Price to net income.
• Price to EBIT and EBITDA.
• Price to seller’s discretionary cash flow.
• Price to business assets.
• Price to owners’ equity.

Example - valuing a metal recycling company using valuation multiples.

To demonstrate how the value of a business in this industry can be determined, let’s select a firm with the typical financial performance as follows:

• Gross annual revenue: $3,000,000.
• Net sales: $2,900,000.
• Gross profit: $1,000,000.
• Net income: $250,000.
• EBIT: $145,000.
• EBITDA: $282,500.
• Seller’s discretionary cash flow (SDCF): $750,000.
• Furniture, fixtures and equipment (FF&E) assets: $400,000.
• Inventory: $355,200.
• Total business assets: $950,000.
• Book value of owners’ equity: $600,000.

Next, we apply a set of reasonable valuation multiples and come with the following business valuation results:

Fair market value or investment value?

Market based valuation as this example illustrates tends to be a great way to determine the fair market value of your business. This is because the valuation multiples are derived from a large number of comparable business sales, establishing the “going rate” for similar business investments.

Exceptional companies may attract very strong investor interest. Professional investors that are looking for synergies to enhance their portfolio in your market segment may be willing to pay a premium for the right business opportunity. As a result, your actual investment business value may well exceed the fair market value estimate.

Business people often ask us: “Are different business valuation methods used to value companies in different industries?” It is a very sensible question - after all the differences between, say, a manufacturing firm and a dental practice are profound.

Professional business appraisers have developed an elegant, powerful framework to deal with this challenge. At the core of this framework are a set of universal business valuation methods that can be applied to valuing any business.

All these methods are grouped under the three major approaches to business valuation:

• Asset - based on the values of individual business assets and liabilities.
• Income - based on the company’s earnings outlook and risk profile.
• Market - by comparing the subject business to similar companies, in the same industry segment, that have recently been sold.

There are several reasons why this business appraisal framework can handle any business:

• All standard business valuation methods consider the industry-specific value drivers.
• These valuation methods provide a consistent way to measure business value while accounting for the unique attributes of your business and its industry.
• Each standard valuation method offers a different way of measuring the business worth, complementing the results you get from other methods.

Support by major business appraisal standards

The power and flexibility of this business valuation framework have made it the de-facto standard in all professionally conducted business appraisals. In addition, the multi-method business valuation is supported by the key appraisal standards such as the USPAP, AICPA SSVS No 1, and the IRS Revenue Ruling 59-60.

Let’s take a quick look at the typical valuation methods that are used to value companies in just about any industry:

Asset based valuation methods

The Asset Accumulation method lets you determine the overall business value based on the valuation of individual business assets and liabilities.

Current market values of these assets and liabilities are used to create the appraisal of a business. Needless to say, these market values are defined by the industry-specific factors. Examples are prices paid for similar equipment, royalty rates charged for customer lists or licenses and property rental costs.

Capitalized Excess Earnings method is another asset based valuation technique that is especially useful in measuring the value of business goodwill. Again, the industry conditions affect the market value assessment of individual business assets along with the capitalization rates used by this method.

Income based valuation methods

This group of appraisal techniques is perhaps the best example of how the industry factors affect the business value. Both capitalization methods, such as Multiple of Discretionary Earnings, and discounting techniques, such as the Discounted Cash Flow method, require business risk assessment. The industry-specific risk is one element of the discount and cap rates used by these valuation methods.

Income based valuation also requires that you forecast business earnings. This will most certainly be affected by the trends in your industry segment.

Market based valuation methods

These appraisal techniques rely on comparison to sold businesses in your industry segment. As a result, the business value estimates reflect the industry conditions such as investor demand for similar companies.

As a rule, business investment requires careful assessment of industry-specific growth prospects and risk. Hence, by using the market-based valuation multiples derived from similar business sales, you are effectively relying on the judgment of other business people about what a company in a specific industry is worth.

Since each method takes a different view of business value, throwing several standard methods into the mix is a very good idea. In fact, the use of multiple valuation methods is expected of all professionally prepared business appraisals.

Continuing our discussion about valuation of software services companies, let’s focus on the market valuation approach.

A central technique under this approach is the comparative transaction method. It is especially useful for valuing private software firms. In a nutshell, the method lets you determine the value of your software firm in comparison to similar companies that have recently sold.

Privately owned software companies with a solid track record of profitability are frequent acquisition targets. You can study the selling prices of successfully closed deals in relation to the financial performance of such companies.

Valuation multiples

Valuation multiples are the usual tools to estimate the fair market value of your software company using the market approach. For example, you can calculate your company value in relation to its revenues, gross profit, net income, EBIT, EBITDA, discretionary cash flow or business assets.

One of the main advantages of using such valuation multiples is that they are based on actual sales thus offering a highly objective and defensible way to estimate what your software company is worth. This is especially useful if you need to prove your business value to a skeptical investor, or defend your valuation in court or before the tax authorities.

Example - valuing a custom software development company using valuation multiples

We will take a typical contract software development firm with the following financials:

• Gross revenue: $1,300,000.
• Net sales: $1,200,000.
• Gross profit: $1,000,000.
• Net income: $230,000.
• EBIT: $370,000.
• EBITDA: $385,000.
• Seller’s discretionary cash flow (SDCF): $400,000.
• Furniture, fixtures and equipment (FF&E) assets: $450,000.
• Total business assets: $500,000.
• Book value of owners’ equity: $225,500.

We pick a set of reasonable valuation multiples and estimate the value of this software company as follows:

Each business value estimate can shed a different light on what drives the value of your software company. For example, a high business valuation result based on EBITDA may point out that the company manages its profitability better than the industry average.

An asset rich firm will likely show a higher business value estimate based on the value of its total assets, both tangible and intangible, such as internally developed technology or business processes.

Using business valuation as a strategic tool

Showing how business value depends on your company performance in this way can help you in strategic planning and decision making.

A key question: what value factors can be improved to increase the overall business value? You can focus on the areas that can enhance the value of your company, then measure the result by repeating your business appraisal.

If you own a private mailing business or need to appraise one for a client, here are some interesting statistics to consider:

Mail box rental and shipping companies are classified under the SIC code 7389 and NAICS 561. This business services sector has just under 1,500,000 firms that generate over $301B in annual revenues.

The business services industry segment employs some 3,639,000 people. Yet the average firm is definitely small business: with annual sales of $200,000 and a staff of just 2.

Business valuation methods for mail box rental and shipping firms

Successful private mailing companies sell quite often. You can develop a very good idea of your business value by comparing it to the companies that sold recently. Using the valuation multiples derived from such business sales, you can calculate the fair market value of your business based on its revenues, gross profit, net income, EBIT and EBITDA, the business asset base and owners’ equity.

Example: valuing a mail box rental business using valuation multiples

To demonstrate this market approach to valuing a business, let’s take a typical mail box rental and shipping firm with the following financials:

• Annual gross revenue: $200,000.
• Net sales: $185,000.
• Gross profit: $120,500.
• Net income: $17,000.
• EBIT: $18,900.
• EBITDA: $19,250.
• Seller’s discretionary cash flow (SDCF): $75,000.
• Furniture, fixtures and equipment assets (FF&E): $50,000.
• Inventory: $4,500.
• Total business assets: $61,500.
• Book value of owners’ equity: $44,000.

We next pick a set of sensible valuation multiples to calculate the value of our example business as its potential selling price:

Other business valuation methods for private mailing service companies

No business valuation is complete without the use of several methods under each approach: Asset, Income and Market. Since many mail box rental and shipping businesses are owner operated, the Multiple of Discretionary Earnings method is an excellent complement to verify your market value assessment.

Using this well-known income-based valuation method, you can create a comprehensive appraisal based on the business earnings and 14 critical financial and operational performance factors.

If the business has established itself in its market place over many years, chances are there is considerable goodwill. To determine the value of business goodwill, consider using the classical Capitalized Excess Earnings method. Known as the Treasury Method, this valuation technique lets you calculate the value of business goodwill and total company value.

Do you own a lanscaping services company? Need to determine the value of your own business or prepare an appraisal for a client? Here are some interesting industry statistics to consider:

Key landscaping industry statistics

Classified under SIC code 0781, there are over 49,370 landscaping planning, design and counseling establishments in the US alone. The industry as a whole generates $10.9B in annual revenues and employs over 205,000 people. Yet an average landscaping company is a typical small business: it produces around $200,000 in annual sales with a staff of 4.

Business valuation of landscaping companies

By far the most objective evidence of what a landscaping company is worth is recent sales of similar businesses. Business appraisers refer to this business valuation technique as the Comparative Transaction Method.

Valuation multiples derived from such business sales offer you an excellent tool to estimate your business value. Here are the typical multiples used for landscaping business appraisals:

• Multiple of gross revenues or net sales.
• Multiple of gross profit.
• Multiple of net income.
• EBIT and EBITDA based valuation multiples.
• Multiples relating your business value to its fixed or total assets.
• Business value as a multiple of owners’ equity.

Example: valuing a landscaping company using multiples

Let’s take a typical landscaping services firm with the following financial parameters:

• Annual net sales: $600,000.
• Gross profit: $410,500.
• Net income: $56,250.
• EBIT: $57,000.
• EBITDA: $59,600.
• Total business assets: $195,000.
• Book value of owners’ equity: $102,500.

We next pick a set of reasonable valuation multiples to calculate the company value as follows:

Asset and income methods for valuing a landscaping business

To complement your market-based valuation,  consider the the well-known Multiple of Discretionary Earnings method. This income-based business valuation technique is especially suitable for valuing owner-operator managed landscaping service companies.

For a business that has excellent reputation in its marketplace, the value of business goodwill can be considerable. To appraise the value of business goodwill, consider using the Capitalized Excess Earnings method, known as the Treasury Method. Many professional business appraisals use this asset-based method to value goodwill as well as determine the total business value.

If you own a software firm, plan to start one or acquire an existing company, here are some interesting facts to consider:

The two main segments of the software industry are custom software services and pre-packaged products.

Software development services firms

Classified under the SIC code 7371, the firms in the software service industry concentrate on creating solutions for clients, usually other businesses.

The industry segment as a whole counts over 49,500 establishments in the US alone. These software companies employ around 572,000 people and generate over $57.7B in annual sales. The average contract software development company makes about $1.3M in annual revenues and employs a staff of 12.

Software product development companies

Software companies that develop and sell their own products are classified under the SIC code 7372. The pre-packaged software industry has just under 19,000 firms operating in the US market with a total employment force of some 264,000.

The segment generates an impressive $152B in annual sales. An average company does about $9.2M in revenues per year with a staff of 14.

One interesting observation you can make is that the software services industry creates fewer dollars with more people. One reason is that the software services are more labor intensive. However, the service companies have an easier time establishing a loyal customer base and recurring business.

Key value drivers for software companies

Regardless of which market segment your software company is in, these key factors make the major difference to its value:

Earnings growth prospects

Software products can be highly profitable if focused on the right market segment with significant demand. Product firms especially can experience significant revenue growth quickly with the right product mix.

Profitability

Keeping costs under control is not an easy task for a software company. The costs of developing and marketing software products are very high. The firms that manage growth while keeping their cost from escalating are far more valuable than their unprofitable counterparts.

Stability of earnings

Maintaining consistent level of sales and profitability can be very difficult especially for pure product software companies. Competition can introduce an alternative product and sudden market changes can make a star product obsolete very quickly.

This is where the service companies tend to do better - the customer loyalty tends to translate into repeat business, stable prices and steady earnings. The costs of entering the new market segments are also lower for software services companies as they tend to rely on  existing customers and referrals to do so.

Business valuation methods for software companies

As with any business, you can value a software company three ways, known as appraisal approaches:

• Asset - based on the company’s asset base.
• Income - based on the firm’s earning power and risk.

Established software firms tend to be frequent acquisition targets. Hence, there is solid evidence of their market value as shown by the actual business selling prices. Thus, you can use the market valuation methods quite effectively to appraise your software business.

At the same time, the growth potential is a key element of value in any software company. Income-based business valuation methods, such as the Discounted Cash Flow technique, are an excellent choice to value a software firm.

Combined Market and Income approach: First Chicago Method

For a highly accurate business appraisal, you can combine the two approaches. This technique is often referred to as the First Chicago method. Under this method, you can assess the value of your software business using the Discounted Cash Flow method. This requires that you create a set of earnings forecasts and assess the business risk.

Since the future is never certain, you can improve the accuracy and validity of your business appraisal by repeating the Discounted Cash Flow analysis under a couple of possible scenarios, such as the worst case and best case outcomes. You can average the results to come up with an estimate of what your company is worth.

The market comparisons serve as the objective proof to back your income-based valuation results. Since the market valuation is based on the actual data on similar business sales, it tends to act as a sanity check on your forward-looking income-based valuation.

Again, combine the income and market-based valuation results for a highly defensible, comprehensive estimate of what your software company is worth.