Knowing the value of a business is an important step in getting ready to sell it. When it comes to business valuation, there are many different methods of valuation that can be used to determine what a business is actually worth to a buyer. Andrew Sherman explains, “A professional business appraiser typically applies several different methods of valuation that fit into these categories and uses the knowledge gained to pick one or two methods that make the most sense to arrive at a range of values for a company” (source: https://www.entrepreneurship.org/resource-center/methods-of-company-valuation.aspx).
Business Valuation Methods
There are a number of different valuation approaches that can be taken by business appraisers when looking at the value of a business. Mike Handelsman explains, “One of the reasons business valuation is such a complicated issue is because there are many acceptable valuation methods. Rather than using a ‘one-size-fits-all’ valuation approach, sellers need to decide which method is right for their business based on industry, size and the circumstances of the sale” (source: https://www.inc.com/mike-handelsman/demystifying-small-business-valuation.html).
The most common methods of business appraisal are asset-based valuation, earnings multiplier valuation, income approach valuation and the comparable worth method. It is important to note, however, that there are many more forms of these basic valuation models that can be used depending on specific business circumstances to more accurately define a business’s value. For example, some more sophisticated appraisal methods that are provided to business owners looking to sell their businesses are:
Multiple of Discretionary Earnings Method
Having access to business profits is one way of looking at the value of a business, but it does not tell the whole story. The multiple of discretionary earnings method of valuation attempts to define the true value of a business by taking the profits listed on recent tax return documents and adding to them all of the business’s expenses, which are considered to be at the discretionary control of the business owner. These expenses would include salaries for employees, provided health and retirement benefits, non-recurring business expenses and so forth. The full value of these expenses plus the actual profits of the business is said to be the actual value of the business because a prospective buyer would have this amount available to finance the debt incurred in the acquisition and also pay out as an owner salary.
Excess Earnings Method
While some valuation methods focus primarily on tangible business assets, the excess earnings method of valuation looks at a business’s goodwill (which is to say the business’s intangible assets) to complete the picture of a business’s value. Goodwill is a measure of current assets that are ready to produce business income, any excess business income that exists and also expectation of future economic benefit from the business. In the case of a business that has a strong future, business goodwill can substantially add to the valuation figure.
Business needs and specific details like sales volume will determine what type of appraisal or valuation service will be needed. (source: https://www.sunbeltbayarea.net/business-valuations/).