If you want to get a top quality business appraisal, consider using several well-known business valuation methods.
Such a multi-method business valuation is standard in professionally prepared appraisals. Since each method represents a different view of how business value is measured, reviewing the results from several different methods gives you a comprehensive picture of what the business is worth.
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 used 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 see what your business is worth.
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. Business value is usually measured against the firm’s revenue, profits, cash flow, EBIT, EBITDA, business assets or owners equity.
Valuing a company by direct capitalization of earnings
Smaller service businesses, especially those with mostly recurring revenues, can be valued using the Multiple of Discretionary Earnings method.
Discounting cash flows to determine business value
For larger firms or those experiencing significant earnings fluctuations over time, the Discounted Cash Flow method may be more appropriate.
Valuation of business assets: tangibles and goodwill
Business goodwill can be a big part of the total asset base for service companies. To determine the value of goodwill, consider using the Capitalized Excess Earnings method, also called the Treasury Method.
Establishing 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.