Get an Accurate Business Valuation (part 2)

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Methods of Valuation

Methods of Valuation

Buyers of stock in your company or potential venture capitalists see your company in a different "light". Here are some basic methods of placing a value on your company.

The crudest valuation method is known as the "multiples" method, which operates by rules of thumb. For example, legal firms are commonly valued at 40 to 100 percent of their annual fees, while landscape businesses are estimated at 1.5 times their discretionary earnings, plus the value of their capital assets. However, multiples only give a rough, industry-wide ballpark figure for business value, not an exact value.

More accurate methods include the "balance sheet" approach, which basically subtracts business liabilities from assets. The "adjusted book value" method is similar, but uses current market value rather than purchase price or depreciated value.

Retail and manufacturing businesses are often assessed according to asset value, assuming those assets are significant. Service companies are often valued using the "capitalization of income" method, which places a heavy emphasis on intangible assets. It's also possible to calculate the value of a private company by making a comparison with an equivalent public company and making appropriate adjustments. Business value can also be estimated by anticipating cash flow over a three- to five-year period, and adjusting that into current dollar amounts.

Conclusion

Business valuation tends to rely on sophisticated financial calculations, good judgment on likely prospects for a business, and an astute assessment of a variety of intangible factors. For that reason, business valuations should never rely on an owner's best guess. A professional accountant will be able to advise you on which valuation methods will be best suited to your individual business circumstances.

Get an Accurate Business Valuation (part 2)

By: Frank Nagy

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