A Quick Look at the Methods for Valuing a Business
In my previous blog, Methods For Valuing A Business: Part 1 – Understanding the Asset Based Valuation, I started the discussion of the different ways to value a privately-owned and closely-held business. I outlined that there are only two basic approaches that are the basis for all traditional valuation procedures; the valuation of assets and the return on investment. I also outlined that these procedures further break down in to four fundamental methods. Each of these four methods is important in estimating the value of your business, depending upon the type of sale that you plan to use. The four methods are:
- Asset based valuation (liquidation value)
- Market comparison valuation
- Present value of the business’s future earnings valuation
- Capitalization of current net earnings valuation
The Market Comparison Valuation
In part one, I discussed the asset based valuation and how it is relatively easy to determine as you are selling the assets of the business and not the business as a going concern. The second method is the market comparison valuation which is very difficult to accomplish unless you can identify a similar publicly-traded company and obtain key operating data. Presumably, the outstanding share valuation will help to determine the marketplace’s view of the value of the company.
Calculate Your Valuation, But Beware
To determine the business’s total valuation, simply multiply the number of issued share for the company times the per share price. Of course, relying on the value of publicly-traded stock to accurately reflect the true value of a company is chancy at best. Is the stock market in general in a bull (up) or bear (down) phase? Is the industry out of or in favor at this point in time for some unknown reason? Are stock prices reflecting investors’ optimistic anticipation of future earnings or reflecting pessimism based on past disappointing earnings? Because you most likely will not know the answers to these questions, a valuation comparison of a publicly-traded company to yours is not realistically feasible.
Another Market Comparison Option
Another way to perform a market comparison valuation is to find a similar privately-owned company which has recently sold and for which there is enough information to make a reasonable comparison. The problem still remains for you to obtain enough data to be able to do a reasonable apples-to-apples comparison. Typically, you will not find enough information about the selling business’s sales and profitability, structure of the sale, or purchase price to allow you to make a meaningful comparison. However, a good business broker with specific recent experience with companies like yours may be able to shed some light on the potential value of your business as compared to recent sales.Learn how to do a market comparison valuation and know what to watch out for. Click To Tweet
About Lisa Sharp – Based out of Pensacola, Florida, Lisa has worked in commercial real estate since 2000 and specializes in business brokerage and commercial sales and leasing. Her experience as an owner and operator, of multiple businesses, makes her especially qualified to help clients purchase and sell businesses. Click here to read her full bio, or if you would like to contact her, you can call her at 850-434-7500, or email her at [email protected] You can follow her on Twitter at @lsharpsvn.