As active members of the business valuation world, we understand that there's some confusion over the wide variety of business valuation report types. Because we regularly receive questions from clients about all the different types, we've put together this short guide to help you understand how these different types work and in what situations they may be appropriate.
What are the Different Business Valuation Report Types?
- Adjusted Net Asset Value: This method adjusts assets and liabilities to fair market value, providing a realistic view of the business' overall value. It does not, however, account for any values beyond the company's assets minus its liabilities, leaving intangible assets out of the calculation.
- Liquidation Value: This is based on the idea that a business will cease and calculates the orderly or forced liquidation value of business assets. Though this is commonly seen in bankruptcies, it's not often used for solvent companies as it represents a worst-case scenario.
- Book Value: This method is only very rarely used because it is based on accounting values, which can be rapidly depreciated, rather than real-world value, such as equipment that is depreciated in one year, but is expected to have a long lifespan.
- Excess Earnings: Used to measure reputation, goodwill and intangible value, this method calculates the earnings considered to be above normal return on assets, which works well when a business' reputation is part of its value.
- Capitalization of Earnings: When a business earns a regular increasing income, this method projects that increasing income to a certain point in the future to calculate value.
- Discounted Earnings: Also referred to as Discounted Cash Flow, this method is used when a business has inconsistent growth or income. Much like Capitalization of Earnings, it projects the expected current value of future growth.
- Guideline Public Company: When a private investor buys stock in a public company, that data is recorded. In this method, that value is applied to a similar private company and adjusted for differences between companies.
- Guideline Company Transactions: This method uses the value of closely-held businesses of a similar industry, size, location, product and service to calculate the value of the business being appraised. The comparative value of recent revenue is generally considered more important than that of historic sales levels, allowing valuation at current value rather than historic value.
- Multiple of Discretionary Earnings: This method takes a similar small company's financial statements and adjusts them to the company being appraised. The sample company adjusted earnings from transactions is divided by the discretionary earnings, providing a multiplier that is then applied to the discretionary earnings of the company being appraised.
- Gross Revenue Multiple: By dividing transaction price by the appraised company's revenue, a company's value can be determined as compares to the similar business' to determine an appropriate multiple. Unfortunately, it doesn't distinguish between companies that are running at a profit and those that are operating at a loss, making it less than accurate.
With all the different situations a business may find itself in, it's important to have a range of business valuation report types available. These different types help you get the most out of your company, no matter your circumstances. By having an idea of what each report type represents, you can better grasp the overall information presented in your valuation report and how it applies to your situation.