How much is your business worth?

You have dedicated time to your business, you worry about maintaining it and you do everything in your power to keep it up to date. But... Do you really know what its market value is? Have you thought about whether in the future you will need to know?

There are three (3) traditional valuation approaches that can be used to determine how much your business is worth: the Income Approach, Market Approach, and Asset Approach. Within these three (3) approaches, several methods may be used to estimate value. Doing an appraisal every two (2) years is enough for the owners to have an idea of ​​where they stand and explore growth opportunities.

Business owners should assess their business in the following scenarios:

1. Selling a Business/Exit Strategy

2. Estate and Tax Planning

3. Shareholder/Partnership Transfer or Disputes

4. Arbitration or Litigation

5. Marital Dissolution

6. Securing Financing

 In a full business valuation (referred to as a “Conclusion of Value”), the valuation expert must consider all approaches, and use their professional discretion to decide which method, or combination of methods, is most appropriate.

An overview of these approaches follows:

The Income Approach determines the value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert expected income or cash flows into a present single amount. The application of the income approach determines value by methods that either discount or capitalize earnings or cash flows by a rate that reflects market return expectations, market conditions, and the risk of the investment.

The valuation analyst also considers adjustments for items as:

• Discretionary expenses

• Nonrecurring revenue and expenses

• Unusual tax issues or accounting methods, among others.

Generally, this can be accomplished by the capitalization of earnings method and/or the discounted cash flow method.

The Market Approach is a valuation technique based upon the principle of substitution. The basis of this approach is to identify and consider companies in the same industry as the subject interest to provide valuation guidelines. Additionally, valuation multiples indicated in comparable merger and acquisition (M&A) transactions may also be considered, as well as prior transactions involving the capital stock of the subject interest being valued. Valuation multiples for such companies are calculated and analyzed. Experts usually rely on pricing multiples, such as a revenue or some measure of profit (e.g., EBITDA) multiple, to arrive at the indicated value. Adjustments can be made to better match the subject being valued with the comparable companies and transactions. 

 Also known as the Cost Approach, the Asset-Based approach indicates the fair market value based on adjusting the company’s asset and liability balances to their fair market value equivalents. This approach is based on the identification, valuation, and summation of the subject interest’s underlying assets, both tangible and intangible. Usually, experts utilize this approach in cases where the subject interest is an asset holding company or is experiencing issues related to liquidation. Unlike the other two (2) approaches, this one disregards the future earnings potential. Therefore, the business value of a company can be much higher as compared to when considering only its underlying assets.

 There are no specific rules that require that a specific approach and/or method is used for certain types of businesses or situations. The approach and method that the expert chooses depends on careful consideration of all relevant information and circumstances of the subject being valued.

90% of the time, Income Approach and Market Approach are used more because these two approaches consider the value of the entire operation of the subject interest that is being valued, in addition to the expected future earnings. Even so, each case is evaluated individually, and the most appropriate approach is determined based on the circumstances. The Asset approach is usually used only for companies that do not have operations (holding companies) or that are in liquidation

Here at On Point Strategy we have licensed professionals, Certified Valuation Analysts® (CVA), who can guide you through the valuation process and help you fulfill your business needs. If you would like to find out more information about the “OPS way” of providing business valuation services contact us at 787-766-6100.