Business valuation methods for established service companies
Need to know how to value a service business? To get a top quality business appraisal, consider using several well-known business valuation methods.
Professionally prepared appraisals use several valuation methods. Be aware that each method represents a different view of measuring business value. So it’s a good idea to review the results from several different methods to get a good picture of business value.
Choose valuation methods that work best for you
In practice, you can choose some valuation methods over others because they are more suitable for your specific situation. Here are the typical method choices you should consider for valuing established service firms:
- Valuation multiples based on comparable business sales
- Multiple of Discretionary Earnings valuation method
- Discounted Cash Flow method
- Capitalized Excess Earnings method
Using market comps to value a service business
Successful companies in the services industry sell often. Hence you can do valid market comparisons to recent business sales to figure out your business value.
The valuation multiples are ratios that help you estimate the market value of a business based on the actual selling prices of similar firms and your company’s financial performance measures. For instance, business appraisers usually measure business value against the firm’s revenue, profits, cash flow, EBIT, EBITDA, business assets or owners equity.
Valuing a service company by capitalization of earnings
You can value smaller service businesses, especially those with mostly recurring revenues, using the Multiple of Discretionary Earnings and Capitalized Earnings methods.
Discounting cash flows to determine business value
For larger firms or those experiencing significant earnings fluctuations over time, you may find the Discounted Cash Flow method a better fit.
Valuation of business assets: tangibles and goodwill
Service companies can build up a lot of business goodwill as part of their overall value. To size the value of goodwill, consider using the Capitalized Excess Earnings method, also called the Treasury Method.
Establishing service business value
The results you get by using the various business valuation methods may differ. This is quite normal since each method uses a different set of rules to determine business value.
You can use your results to establish a range of business values, from low to high. On the other hand, you can average your business value results and come up with a single number. Both techniques are very common in professional business appraisals.