Ask any professional business appraiser and you will hear the same advice:
There is a good reason for this insistence – no business valuation method is best. Each method looks at a different set of business fundamentals. This gives you a different view of what drives your business value.
If you are after a solid business appraisal that passes muster – in the boardroom or the court room – consider using several business valuation methods.
Asset business valuation tends to set the upper bound on your business value
Asset based methods, such as Asset Accumulation or Capitalized Excess Earnings, let you calculate your business worth based on its assets and liabilities.
The results tend to be on the high side, especially for asset-rich businesses such as manufacturing and distribution firms. A couple of reasons for this: some company assets may be currently underutilized. Business owners could rent out excess capacity or floor space and generate additional revenues.
Other business assets may not be currently put to their “highest and best use”. For example, business owners can license some of their technology and generate royalty income in addition to the current product sales.
Doing your business value analysis using asset based methods can help you uncover such value enhancing opportunities in your company.
Need to determine business fair market value? Consider market based appraisal methods.
Market is widely considered the ultimate arbiter of what a business is worth. Recent business sales of similar companies are an excellent way to determine the market value of your business.
In a stable market, business sellers and buyers enjoy roughly equal bargaining power. So the business selling prices tend to settle to an equilibrium – establishing the fair market value for your business.
Valuation multiples derived from such business sale statistics are a great way to come up with the most probable business value number – the reasonable selling price somewhere in the middle of the low and high range of selling prices.
A word of caution – business market value and its theoretical “fair market value” are not the same. Business market value is the expected selling price if you try selling a business under the current market conditions. Fair market value assumes that business buyers and sellers do not enjoy significant advantages over each other and that the market conditions are stable.
For example, in stressed markets some business owners may decide against selling. Others may feel compelled to sell just to get out. Such motivated sellers are unlikely to get a fair market value price for their business. If you observe the business selling prices in this type of market, you are likely to see valuation multiples that are well below their historic averages.
Your business valuation depends on your assumptions – income business valuation
No two businesses are the same, and each business person sees the value of a given business differently. Income based business valuation methods give you the tools to determine what the business is worth to you – based on your unique expectation of business earning prospects and risk.
Business appraisers often refer to the so-called investment standard of value when talking about income business valuations. What this means is that each business person uses a different measuring stick when estimating what a business is worth.
All business valuations are forward looking. Your income forecast may be different from mine. In addition, you may assess the company’s risk based on your specific action plan.
Even if we use the same valuation methods, the results may differ. Business for sale market has a couple of well-known participants that demonstrate two extremes:
The financial business buyers are after immediate, low risk income streams. They tend to be conservative in their earnings and risk assessment. Hence, their income-based business valuations trend lower.
On the other hand, synergistic business acquirors look for unique advantages. They can envision much more positive outcomes and calculate a higher business valuation result.