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Best Business Valuation Methods

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(@Anonymous)
New Member

Hallo,
A Business Valuator (or anyone valuating your business) will use a variety of business valuation methods to determine a fair price for your business, such as:
1) Asset-based approaches

Basically these business valuation methods total up all the investments in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis.

* A going concern asset-based approach lists the business net balance sheet value of its assets and subtracts the value of its liabilities.

* A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.

2) Earning value approaches

These business valuation methods are predicated on the idea that a business's true value lies in its ability to produce wealth in the future. The most common earning value approach is Capitalizing Past Earning.

With this approach, a valuator determines an expected level of cash flow for the company using a company's record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.

Discounted Future Earnings is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor.

What might such capitalization rates be? In a Management Issues paper discussing "How Much Is Your Business Worth?", Grant Thornton LLP suggests:

“Well established businesses with a history of strong earnings and good market share might often trade with a capitalization rate of, say 12% to 20%. Unproven businesses in a fluctuating and volatile market tend to trade at much higher capitalization rates, say 25% to 50%.”

3) Market value approaches

Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.

Although the Earning Value Approach is the most popular business valuation method, for most businesses, some combination of business valuation methods will be the fairest way to set a selling price.

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Topic starter Posted : 16/02/2010 5:11 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Hi

BOOK VALUE BUSINESS VALUATION METHODS: The book value is simply the business valuation based upon the accounting books of the business. Assets less liabilities equals the owners equity, which is the "Book Value" of the business. The problem with book value business valuation is that the accounting records may not accurately reflect the true value of the assets in the business valuation.

ADJUSTED BOOK VALUE BUSINESS VALUATION METHODS: Your MBA performs two types of adjusted book value business valuation: Tangible Book Value and Economic Book Value (also known as book value at market).

Tangible Book Value business valuation is different than book value in that it deducts from asset value intangible assets, which are assets that are not hard (e.g., goodwill, patents, capitalized start-up expenses and deferred financing costs).

Economic Book Value business valuation allows for a book value analysis that adjusts the assets to their market value. This business valuation allows valuation of goodwill, real estate, inventories and other assets at their market value.

Thanks

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Posted : 18/02/2010 9:13 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Thank you for sharing the information. Please keep sharing more and more.

Have a nice day

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Posted : 19/02/2010 8:34 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Hello Friends,
Business valuation should be considered a starting point for buyers and sellers. It's rare that buyers and sellers come up with a similar figure, if, for no other reason, than the seller is looking for a higher price. Your goal should be to determine a ballpark figure from which the buyer and the seller can negotiate a price that they can both live with. Look carefully at the numbers, but keep in mind this caution from Bryan Goetz, president of Capital Advisors, Inc., a business appraiser: "Businesses are as unique and complex as the people who run them and are not capable of being valued by a simplistic rule of thumb."In finance, valuation is the process of estimating the potential market value of a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a company). Valuations are required in many contexts including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.
Thanks.

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Posted : 22/02/2010 11:18 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

We first turn to the central issue—What is a business valuation? To answer this question, consider the following example. You own IBM stock and you want to know how much it is worth. Well, all you have to do is pick up the business section of the daily newspaper or go to any financial website, locate the stock tables and multiply IBM's closing price by the number of shares you own. Through this simple exercise, you have valued your IBM shares or what you would receive in cash if you sold your shares at the closing price.

In concept, valuing your private business is the same as valuing IBM stock. But, because your firm is private, there is no stock table that you can conveniently turn to. No need to worry, however, because there is a pseudo-science, or some say an art form, that provides the foundation for skilled business appraisers to estimate what your business is worth. The problem is that the valuation process is often viewed as a "black box." As a result, a whole mythology has grown up around valuation of private businesses. To help de-mystify the valuation process, let me introduce you to my top five myths about valuing a private business and explain how to avoid the pitfalls these myths present.

Top 5 Business Valuation Myths

Myth I: Valuing a private business should only be done when the business is ready to be sold or a lender requires a valuation as part of its due diligence process.
Although the business sales and lending processes generally require that valuations be completed, if these events represent the first time an owner has a valuation completed, then you can be sure critical business and estate planning issues have not been addressed. If the business is to have a life beyond that of its current owners, then effective planning for ownership transition requires a regular valuation of the business.

Ownership transition may include gifting some percentage of ownership shares to family members during the owner's life, thus reducing any tax on the owner's estate at death. If a firm has several owners, a buy-sell agreement with accompanying life insurance should be in place so that if an owner dies, the remaining owners have sufficient funds to purchase the deceased owner's interest at an agreed upon value. The buy-out value under these agreements should be updated regularly to reflect the firm's financial progress over time and the valuation approach used should be one of several acceptable to the IRS.

Myth II: Businesses in my industry always sell for two times annual revenue (the revenue multiple). So why should I pay someone to value my business?
The short answer is that data on selling prices indicate that revenue multiples within an industry are generally all over the lot. These rules of thumb used by business brokers, the individuals who often facilitate private business transactions, are median multiple values. The median value indicates that half of the revenue multiples are below the median value and half are above. Thus, the median value is just a convenient midpoint and does not represent the revenue multiple for any actual transaction. Unless the firm that is being valued is truly a median firm, then using the industry rule of thumb for this purpose is clearly wrong.

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Posted : 25/02/2010 2:02 pm
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Hello
In order to know a good bargain when you see one, you must have some understanding of business valuation
. This article covers the concept of the highest and best use, which is a very important concept in business valuation.

The highest and best use is a concept of property appraisal. This concept tells us that the value of a property should be estimated in anticipation of its highest and best use. The highest and best use of a property is often its current use but this is not always the case.

The definition of the highest and best use varies but generally the use must be:

* Legally allowable - all illegal uses of a property should definitely not be entertained.
* Financially possible - this means that the revenue generated by the property must justify any investment into that property.
* Physically possible - this means that the use of the property must fall within the physical limitations of the property.
* Maximally productive - the highest and best use of a property should generate the highest profit possible for the owner

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Posted : 26/02/2010 4:39 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Hello
A seemingly salacious title to a blog post, but the Business Valuation industry originated from alcohol - or lack thereof.In 1920 with the enactment of prohibition many enterprises that were engaged in the alcoholic beverage business were allowed tax breaks by the U.S. Government for “damages” suffered. In order to determine certain tax benefits to these businesses their “intangible value” or “goodwill” had to be determined. Prior to this time it was commonly believed that the value in a business was essentially the value of its assets less its liabilities.But, as we know today, business value comes in many forms - although most notably in the cash and profits it generates, has generated, and will generate. But goodwill is also imputed into a brand name, some special technology that may or may not have materialized into a market, and in a myriad of other ways. Even a stable staff generates goodwill.As a direct result of prohibition the IRS published a document called the Appeals and Revenue Memorandum (or ARM) 34. ARM 34 presented two novel ideas: 1) Goodwill exists if a business has earnings in excess of another “like business” and 2) Goodwill value is determined by calculating the “current value” of those excess earnings. These concepts formed the basis for the practice of business valuation today. Additional questions, responses, and new sophisticated methods dealing with business valuation resulted.

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Posted : 26/02/2010 4:45 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

To evaluate the business, we use Profit and loss
Account and Balance sheet for condition of business.
I am business Student and want to talk about business related terms.

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Posted : 26/02/2010 7:23 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

i have found some more tips that i want to share with you:

INCOME CAPITALIZATION VALUATION METHODS: First you must determine the capitalization rate - a rate of return required to take on the risk of operating the business (the riskier the business, the higher the required return). Earnings are then divided by that capitalization rate. The earnings figure to be capitalized should be one that reflects the true nature of the business, such as the last three years average, current year or projected year. When determining a capitalization rate you should compare with rates available to similarly risky investments.

DISCOUNTED EARNINGS: This determines the value of a small business based upon the present value of projected future earnings, discounted by the required rate of return (capitalization rate). Usually, the question is how well earnings are projected.

DISCOUNTED CASH FLOW VALUATION METHODS: Are the small business valuation methods best used to conduct a business valuation on an entity established for the purpose of fulfilling a specific project, in certain startup and other companies where cash flow is more important than net income, and when a certain time frame is set where an investor wishes to see his investment returned over a specific period of time. In discounted cash flow, the present value of liabilities is subtracted from the combined present value of cash flow and tangible assets, which determines the value of the business.

PRICE EARNINGS MULTIPLE: The price-earnings ratio (P/E) is simply the price of a company's share of common stock in the public market divided by its earnings per share. Multiply this multiple by the net income and you will have a value for the business. If the business has no income, there is no business valuation. If the common stock in not publicly traded, business valuation of the stock is purely subjective. This may not be the best choice of business valuation methods, but can provide a benchmark business valuation.

Thank you
andrew

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Posted : 27/02/2010 7:35 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Great tips. Business valuation is very important for a business owner as it gives a clear picture of the company's strength, weaknesses and progress. Your methods are outstanding. It also determines the value of a small business based upon the present value of projected future earnings.

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Posted : 12/03/2010 4:23 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Stocktaker is one of the best resources for Stock valuation.
Source(s):
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Posted : 12/03/2010 6:42 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Hello Friends

They are a number of professions that offer business valuation services. In most areas there is no specific regulation of this profession. Business valuation services are not usually a primary source of revenue, so locating business valuation professionals can be difficult. Here are some types of professionals that commonly offer business valuation (BV) services.
1. CPAs. Many CPAs offer BV services in addition to their normal accounting, auditing, and tax work. CPAs often have a combination of business, accounting, finance, and tax knowledge that is well suited for valuing businesses.
2. Financial Consultants (non-CPA). Financial consultants have varying levels of expertise so their backgrounds should be checked carefully.
3. Business Brokers. Brokers normally stick to valuing the businesses they have listed for sale. They tend to rely on ‘quick and dirty’ methods that work well for determining asking prices, and are not intended to be formal valuations.
4. Commercial Real Estate Brokers/Agents. Commercial real estate professionals sometimes value businesses they list for sale. They are good at appraising real estate, but typically lack the skills and experience to properly value intangible assets like goodwill.

Have a nice day

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Posted : 13/03/2010 7:22 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Here are some of the common methods used to come up with a value.

* Asset valuation
* Capitalization of income valuation
* Owner benefit valuation
* Multiplier or market valuation

Asset Valuation

Asset valuation is used when a company is asset-intensive. Retail businesses and manufacturing companies fall into this category. This process takes into account the following figures, the sum of which determines the market value:

* Fair market value of fixed assets and equipment (FMV/FA) - This is the price you would pay on the open market to purchase the assets or equipment.
* Leasehold improvements (LI) - These are the changes to the physical property that would be considered part of the property if you were to sell it or not renew a lease.
* Owner benefit (OB) - This is the seller's discretionary cash for one year; you can get this from the adjusted income statement.
* Inventory (I) - Wholesale value of inventory, including raw materials, work-in-progress, and finished goods or products.

[Back to top]

Capitalization of income valuation

This method places no value on fixed assets such as equipment, and takes into account a greater number of intangibles. This valuation method is best used for non-asset intensive businesses like service companies.

In his book "The Complete Guide to Buying a Business" (Amacom, 1994), Richard Snowden cites a dozen areas that should be considered when using Capitalization of Income Valuation. He recommends giving each factor a rating of 0-5, with 5 being the most positive score. The average of these factors will be the "capitalization rate" which is multiplied by the buyer's discretionary cash to determine the market value of the business. The factors are:

* Owner's reason for selling
* Length of time the company has been in business
* Length of time current owner has owned the business
* Degree of risk
* Profitability
* Location
* Growth history
* Competition
* Entry barriers
* Future potential for the industry
* Customer base
* Technology

Again, add up the total ratings, and divide by 12 to come up with an average value to use as the capitalization rate. You next have to come up with a figure for "buyer's discretionary cash" which is 75% of owner benefit (seller's discretionary cash for one year as stated on the income statement). You multiply the two figures to determine the market value.

[Back to top]

Owner benefit valuation

This formula focuses on the seller's discretionary cash flow and is used most often for valuing businesses whose value comes from their ability to generate cash flow and profit. It uses a fairly simple formula -- you multiply the owner benefit times 2.2727 to get the market value. The multiplier takes into account standard figures such as a 10% return on investment, a living wage equal to 30% of owner benefit, and debt service of 25%.

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Posted : 16/03/2010 7:49 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

The two primary most widely used and accepted types of valuations are asset value and income value.

*
Asset valuations consider the business to be a collection of assets that have a marketable value to a third party in an asset sale. Asset valuations are typically used for businesses that are ceasing operation and for specific types of businesses such as holding companies and investment companies. Asset valuation methods include the book value method, the adjusted book value method, the economic balance sheet method, and the liquidation method.
*
Income valuations are based on the premise that the current value of a small business is a function of the future value that an investor can expect to receive from purchasing all or part of the business. Income valuations are the most widely used type of valuation. They are generally used for valuing small businesses that are expected to continue operating for the foreseeable future. Income valuation methods include the capitalization of earnings method, the discounted future income method, the discounted cash flow method, the economic income method, plus other formula methods.

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Posted : 20/03/2010 11:49 am
(@Anonymous)
New Member

Re: Best Business Valuation Methods

Hello Friends

They are a number of professions that offer business valuation services. In most areas there is no specific regulation of this profession. Business valuation services are not usually a primary source of revenue, so locating business valuation professionals can be difficult. Here are some types of professionals that commonly offer business valuation (BV) services.
1. CPAs. Many CPAs offer BV services in addition to their normal accounting, auditing, and tax work. CPAs often have a combination of business, accounting, finance, and tax knowledge that is well suited for valuing businesses.
2. Financial Consultants (non-CPA). Financial consultants have varying levels of expertise so their backgrounds should be checked carefully.
3. Business Brokers. Brokers normally stick to valuing the businesses they have listed for sale. They tend to rely on ‘quick and dirty’ methods that work well for determining asking prices, and are not intended to be formal valuations.
4. Commercial Real Estate Brokers/Agents. Commercial real estate professionals sometimes value businesses they list for sale. They are good at appraising real estate, but typically lack the skills and experience to properly value intangible assets like goodwill.

Have a nice day

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Posted : 20/03/2010 11:49 am
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