Given all the various business valuation approaches and methods, you have quite a choice of tools to calculate business value. However, each valuation method you use produces a result that may differ from others. When it comes time to state the subject business value, how can you reconcile the differences?
Business value conclusion – stating your result
There are a couple of choices. Traditionally, the final result of a professionally prepared business valuation is stated in the section of an appraisal report entitled Business Value Conclusion.
In this section the appraiser would list the results obtained from the selected business valuation methods. Then a weight would be assigned to each result depending upon the relative importance and relevance of the method to the appraisal at hand.
Finally, the business appraiser would calculate the weighted average of all the results to come up with a single number. For example, let’s say that our business valuation used the following methods:
|Capitalized Excess Earnings||$2,500,000||40%|
|Discounted Cash Flow||$2,750,000||60%|
If you apply the indicated weights to the results above, the weighted average business value works out to be $2,650,000.
Of course, you would mention in your report why you have selected the weights. Perhaps the company is expected to undergo rapid growth in the near future. You have reflected this upside in your cash flow forecast and used this key bit of information to value the business using the discounted cash flow method.
This puts the spotlight on a very important part of your analysis and justifies a heavier weight on your discounted cash flow valuation.
A range of possible business values
An alternative way to report your business valuation results is a range of values. In the example above you can state that the business is likely to be worth somewhere in the $2,500,000 to $2,750,000 range.
The wiggle room is actually a way of saying that there is market uncertainty that may affect the actual business value putting it somewhere in the middle of your range estimate.
Business Valuation Examples
Why can valuation methods produce different results when valuing the same business? Because each method is based on a different economic foundation and uses a different computational procedure. Take a look at some of the best known valuation methods to see this: