There are several commonly accepted business valuation methodologies. the following are the most common methods: Capitalization of Earnings, Discounted Future Earnings, Adjusted Book Value, Comparable Price, Excess Earnings Capacity. The business valuation expert will carefully utilize the appropriate methods and also utilize the applicable weights to each of the methods to arrive with a accurate and defensible business valuation (value).
In evaluating a business opportunity business buyers and investors use three key factors in a business valuation (value). Buyers (Investors) of businesses place an extensive weight on the business’s ability to generate sufficient earnings, since these earnings allow them to 1) pay themselves a suitable salary, 2) be able to service the debt incurred in the acquisition of the business, and 3) receive a appropriate return on their investment.
Additionally buyers (investors) look at value drivers which are characteristics that reduce the risk of owning the business or increase the probability the business will grow in the future. If these characteristics are present in a business, a buyer will pay a premium price. The most common value drivers include: Management Team, Systems & Procedures, Customers & Suppliers, Facilities & Equipment, Financial Discipline and Growth Strategy.
Another consideration of a business valuation (value) is the relationship between size and risk. Mergers and Acquisitions professionals
refer to a “small-company discount,” which often applies because of the perception that very small companies are riskier than larger businesses. It is generally understood that larger businesses are more substantial and stable organizations because they have found a way to grow beyond the efforts of the owners (s) and are therefore less reliant on the owner(s). Because of this perception, the size of a business affects the valuation of a business.
One of the biggest factors of “how to value a business” and in determining the valuation (value) of a company is the extent to which an acquirer (buyer) can see where the company’s sales will come from in the future. A business that must bring new business each month, the value of such a company will be lower than if the company had repeat sales and could pinpoint the source of future revenues.
A recurring revenue model acts like a powerful pair of binoculars to help see month or even years into the future, so creating a steady stream of revenues is the best way to increase the value of a business. There are various forms of recurring revenue. The more assured the future revenue is, the higher the business valuation of the company.
Brian Mazar, MBA, CBI
American Fortune Business Valuation Services
Category: Personal Finance