Determining the dollar value of a business is a process with which most business owners are familiar with. Combined with that is the fact that business valuations are complicated mainly due to the fact that there are several ways of performing them with the method used to determine the value of a business varies depending upon the circumstances that precipitated the need for a valuation.
Some examples of situations that call for a business valuation are:
- Purchase or sale of a company
- Estate and gift tax determination
- Property settlements pursuant to divorce proceedings
- Creation of buy/sell agreements among owners
- Initiating Employee Stock Ownership Plans (ESOP’s)
- Loan Applications
- Charitable contribution of company stock
Business Valuation Approaches
The three main approaches to a valuation are:
- Asset Based Approach
- Earnings Based Approach
- Market Based Approach
Asset Based Approach
For businesses whose income is derived primarily from its assets, the asset-based valuation is most appropriate. The main characteristics of this particular valuation are:
- Company’s balance sheet items are valued at current market value and intangible assets are added.
- Factors that affect a company’s value either favorably or unfavorably are considered and compensatory adjustments are made.
Earnings Based Approach
This method determines the value of a business based on its anticipated future earnings. Newly formed businesses, companies involved in dynamic industries, and companies that are service-intensive are most appropriate for this form of valuation.
Two main procedures are utilized to determine future value:
- Earnings are projected over a five to ten year period and then adjusted to determine present value.
- Unusual factors are eliminated in a review of past financial data. The normalized results are capitalized to determine value.
Market Based Valuation
Market-Based valuations focus mainly on comparative company data from both the public and private sector within the same or similar industry.
For this type of valuation, it is essential that the appraiser have the appropriate industry resources and is fully appraised of current statistics relating to similar businesses.
Our firm would be happy to apply its resources and experience to your business valuation engagement. For additional information about our business valuation services please contact us at 603-595-8000.