Business Valuation Blog | Understanding Buying / Selling a Company

Keys to Understanding the Market Approach in Business Valuations

Posted by Business Valuation Specialists LLC on Dec 27, 2018 1:57:00 PM

understanding the market approach

Whether you're a seasoned pro at having your business appraised or are just considering having your first business valuation performed, there are any number of terms that show up during the process that can be confusing. One of those is market approach. Used to define the type of calculations that are used in determining the value of a business, this approach uses a range of information from publicly traded companies to provide a baseline which is then adjusted to your company's specific situation. Here's a quick look at this type of valuation approach and the key aspects you need to understand to get the most out of it. 

Keys to Understanding the Market Approach in Business Valuations

  • Based on the principle of substitution, market approaches to valuation uses a recently sold similar public company and bases the final value of the appraised company against the public company's sale price. The business appraiser identified a good match, then compares the businesses to calculate your company's value as an equally desirable business from the aspect of ownership or investment.
  • There are several common methods used to determine business value using this approach. The Guideline Public Company Method, which looks across the board at all the aspects of a publicly traded company that has recently sold, then adjusts those aspects to match the company that is being valued.
  • The Multiple of Discretionary Earnings Method uses discretionary earnings as the yardstick against which the company to be valued is compared. It uses privately held companies versus public companies as the businesses are usually smaller in size.
  • The Gross Revenue Multiple Method takes a look at a company's gross revenues to determine value. This allows business owners to receive the benefit of future business income at the time of sale, an excellent option for retirees who are getting out of a lifelong business or an entrepreneur who is ready to move on.  Like the Multiple of Discretionary Earnings Method it uses privately held companies versus public companies as the businesses are usually smaller in size.
  • Generally speaking, market approaches are used most commonly when a company has been closely held for a number of years providing a guide for determining that value overall.

By understanding the key aspects of how market approach valuation works in a business appraisal, you can have a much better grasp of how your company's value is being calculated and what it means to your business. If you're ready to have a business appraisal performed, remember to only work with a certified business valuation specialist. This helps to ensure that the valuation report you receive is based on solid methodologies and accepted practices, giving you the best possible value for your investment.

Tags: Market Approach

Behind Assets and Liabilities: How Professionals Determine Value of a Company

Posted by Business Valuation Specialists LLC on Oct 12, 2016 3:00:00 PM

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When it comes to determining the value of a company, many people, business owners included, consider only what the balance sheet says or what their local competitor sold for recently. But is that a valid way to determine what a business is truly worth? Not by a long shot. Here's our look at how professional business appraisers calculate the valuation of a company:

Behind Assets and Liabilities: How Professionals Determine Company Value

When a professional appraiser needs to determine the value of a company, the balance sheet approach is one of the last approaches used. Why? Because most businesses are far more than simply the sum of their assets minus the total of their liabilities. There are many factors, such as goodwill and reputation, position within the market and many other aspects that can affect the outcome of business appraisals. Here are two of the most commonly-used approaches to business valuations:

Income-Focused Valuation Methods

When a business is being bought or sold, the person who is selling the business is losing future income. For this reason, many businesses are appraised using an income-focused methodology that takes that income into account when determining the final value for the business. Two different methods are used to calculate the appraised value, specifically based on whether the company's income has remained steady or has been irregular in the past:

  • The discounted earnings or discounted cash flow method is used when income has been irregular or periods of growth are irregular, and is used to determine the current value of future income.
  • The capitalization of earnings method projects the steady growth of the past into the future to determine the current value of that income.

Market-Focused Valuation Methods

The market-focused approach takes into consideration what similar companies have sold for in the market, but customizes the sale figure to the business being appraised. The company used for the baseline may be a similar publicly-traded company or have similar transactions, earnings or revenues to the company being appraised. Common methods used include:

  • The guideline public company method, which uses the price paid for minority shareholders in a similar public company in the industry and adjusts it to the company being appraised.
  • The guideline company transactions method, which compares the sale price of companies that are of similar industries, size, location and products or services offered and makes adjustments to account for the differences between the sample company and the business being appraised.
  • The multiple of discretionary earning method, which adjusts the financial statements from a small company by dividing the sample company's transaction value by its discretionary earnings, which is then used as a multiple for the company being appraised.
  • The gross revenue multiple method, which is similar to the discretionary earning method in that it takes the transaction value but divides it by the sample company's gross revenue to develop a multiple for use in the company being appraised. This can be a poor choice if the sample company and the company being appraised are not similar in terms of profitability.

As you can see, there is much more involved in determining the value of a company than simple bookkeeping or real estate values can provide. The best way to ensure your company is receiving a quality business appraisal is by working with a certified business valuation specialist.

Tags: Market Approach, Income Approach, Asset Approach, value of a company

Determining Business Value: Different Approaches

Posted by Business Valuation Specialists LLC on Aug 31, 2016 1:30:00 PM

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When you are trying to determine the valuation of a company, one of the most important things that comes into play is the approach. Because business valuations are sought for a wide range of reasons, from selling to divorce to mergers, the approach must be customized to the particular situation. In this piece, we'll take a solid look at different approaches to determining company valuation and in which situations they're typically used. 

Different approaches to determining business value

Asset-Based Approach

Though asset-based business appraisals may seem like a good route to explore, they're typically only used in liquidation situations, not by healthy businesses planning on managing risk or expanding. Why? Because if you've spent years building your business and establishing a good reputation in your industry and region, you know that your business is worth much more than the sum of its parts. Asset-based approaches only figure the minimum liquidation value of your business assets instead of looking at the value of an established business in the community or the goodwill that it has created. For this reason, we virtually never used asset-based methodology to determine business value.

Income-Based Approach

An income-based approach uses the current value of future income to calculate a business appraisal. It looks at what the income has been in the past and projects it out for a period of years. The most common methods in this approach are capitalization of earnings and discounted earnings, also referred to as discounted cash flow.

  • Capitalization of earnings takes into account the business earnings and is mainly used when results are steady.
  • Discounted cash flow looks at the expected future business earnings putting more weight in near years versus out years.

Market-Based Approach

By comparison, the market-based approach looks at substitution. The appraiser looks at how much similar businesses have sold for, then adjusts the sale price on the differences between your business and the ones being analyzed. Because the businesses have things in common being in related industries, it is a good method to see what actual acquirers pay.  The most commonly-used methods are as follows:

  • Guideline public company looks at a similar public company compared to your private company. If you are valuing a small business, this might not be the best way to compare entities.
  • Guideline company transactions take similar companies with similar transaction levels and then adjust for any differences. The transactions are then applied against a multiple to determine the value of the company.  Databases provide details of small business transactions.
  • Multiple of discretionary earnings looks at similar companies and what kind of discretionary earnings they make, then adjusts it to the company being appraised to determine business value.
  • Gross revenue multiple looks at the gross revenue of similar companies and adjusts it to the company under appraisal, then uses a multiplier to determine value.

By knowing the different approaches, you gain a better understanding of how valuations work and why your appraiser is selecting a particular method.

Tags: Market Approach, Income Approach, business value

What to Look for in a Company Valuations Appraiser

Posted by Business Valuation Specialists LLC on Oct 15, 2015 9:30:00 AM

company-valuations

Business appraisals combine history, commerce, data, analytics, research, and specialized skills to determine a value for a particular company. If you're looking to buy a business, be it a coffee shop or a dental practice, it is important to determine how much the company is worth before you make an offer. Learn what to look for in a business appraiser to select a company valuations expert with confidence. 

1. Qualifications 

You wouldn't choose a lawyer who hadn't passed the bar. Neither should you choose a business appraiser who did not possess a relevant certification or accreditation.

We recommend selecting an appraiser that has been certified or accredited by the American Society of Appraisers, the American Institute of Certified Public Accountants, the National Association of Business Certified Valuation Analysts or the Institute of Business Appraisers.

Each of these institutions gives a slightly different qualification; what matters is that the appraiser can show updated credentials from one of these organizations. 

2. Demonstrated experience in your niche 

Appraisers specialize just like other professionals. You will want to narrow down your search by looking only at appraisers who are able to appraise businesses.

Once you have narrowed it down to business appraisers, search for those who understand your niche. Some appraisers have experience valuing machinery and equipment, others specialize in appraising food service businesses, and other specialize in evaluating personal care businesses.

You will get a better overall estimation of your company's value if you select an appraiser who regularly performs business valuations in your niche. 

3. Use of accepted methodologies 

Any appraiser performing company valuations will use a combination of methods to determine the value of the company. Methods used can include the market approach, income approach, or asset approach. Ask the appraiser how they will perform business valuation before hiring them, so that you know what to expect. 

Any appraiser should be able to explain their chosen methodologies in plain English and tell you why they are using one methodology over another. Understanding the methods used helps you make sense of the appraised value, so it's critical that you be able to really understand what the appraiser is doing and why he or she is doing that. The appraiser should also be able to apply industry baseline "rules of thumb" instead of using a rule of thumb for one industry (like dental hygiene) in another (such as farming). 

4. Familiarity with any specific needs 

The appraisal process is different by industry and business size. A small business will have different concerns from a large one, and a global company will have different needs from a local firm. If you are selling your business, your goals may be different than if you are planning to auction business assets or preparing for a merger with another firm.

Check in with any appraiser about your specific needs before you hire them, so that you have confidence in the professional expertise of the person you've chosen.

By looking for an appraiser who meets these criteria, you will understand more about the company valuations process. You will also become comfortable with the appraisal process and connect with a specific appraiser. Having confidence in the process is key, whether you are planning to buy a business or hoping to sell yours. 

Business Valuation Specialists provides business valuation services for a wide range of companies. We would be more than happy to speak with you about your appraisal needs. 

Tags: Market Approach, Income Approach, Asset Approach, company valuations

How to Price a Business For Sale

Posted by Business Valuation Specialists LLC on Jul 27, 2015 10:30:00 AM

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How to price a business for sale

Valuing a business seems simple enough on the surface, but calculating  the true market value is not as easy as it appears. And most important, it can cost you a lot of money if your price it too low and a lot of time if you price it too high.

Business Valuation Specialists is a nationwide company specializing in establishing business valuations for privately-held companies under $20M. We take pride in our ability to establish a fair and defensible price that buyers can understand and be willing to pay. Anything but a fair and accurate business valuation is a waste of time for both buyers and sellers.

Our appraisers are certified by the National Association of Certified Valuators and Analysts (NACVA) and our roots go back to 2003 when we first started advising business owners on how to maximize the value of their business and its assets. We are now a national company valuing companies across the country.

One of the most important steps in selling a company is determining how to price a business for sale. A company is perhaps the most important asset most business owners will ever have, but very few owners are familiar with the proper methods to complete business valuations and business appraisals. That is why it is important to work with a professional business valuation company like Business Valuation Specialists.

Using the Market Value Approach

Appraisers often select the market value approach to determine how to price a business for sale. They draw from a database of previous sales that they have access.  Doing proper business appraisals certainly is not as simple as finding a couple of “comps” and running the numbers.

Appraisers must look at the description of the business and take into account factors such as the location and time of the sale. Comparables sales should only be used when the size is comparable and the dates are withing a reasonable range. It is the job of the appraiser to make sure that the comps selected are comparable to the subject.

Summary

Deciding how to price a business for sale is far more complex than most people realize and it can make a huge difference in how much money a business owner makes when the sale is finalized. Business Valuation Specialists pays attention to all the details throughout the entire process to assure that the business owner has a valuation that is useful for planning as well as negotiations.

Tags: Business Valuation, Business Appraiser, Market Approach

How to Value Your Company - Choosing the Right Approach

Posted by Business Valuation Specialists LLC on Jul 20, 2015 10:00:00 AM

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After years of burning the midnight oil and foregoing family vacations, the time has finally come when you need to know how to value your company, but beware, there are dangerous waters ahead! Selling a business requires special expertise that may not be in your wheel house. 

Running a Business like Steering a Ship through Troubled Waters

As the owner of a small or mid-sized business, you face many challenges and have weathered many storms throughout the life of your business. If you started the business, just surviving the first couple of years was a bit or a miracle of its own. You often feel like the caption of a ship traveling through troubled waters. When you are bailing water, it’s hard to even think about how to value your company.

Avoid These Common Mistakes

A 2010 Entrepreneur Article includes these commons mistakes that business owners make when deciding to sell their business. 

  • Insufficient Preparation
  • Unwillingness to leverage professionals*
  • Taking a hands-off approach
  • Failure to Pre-Qualify Buyers
  • Pricing Problems

*You probably realize that business valuation is not an easy task, but like many business owners, you resist bringing in professionals.  Just like you hire an attorney for legal matters and rely on your CPA for financial issues, determining how to value your company is a job for experts in their field.

Business Owners Not Trained to Sell Their Business

As business valuation specialists, we deal with these issues every day and can help you establish the best and most realistic value for the business. We can assist you on the rules of engagement if you are selling your business. You may be an expert at running your business, but you probably are not the best person to decide how to value your company.

How to Value Your Company - The Approaches

There are three primary approaches appraisers use in determining how to value your company:

Asset Approach

This approach is based on the premise that a buyer will not pay more for your business than they would pay for a comparable business.  Company assets and liabilities reflect the book value of the business as it exists right now. It is a Balance Sheet approach (or adjusted Fair Market Value approach) to business valuation.

Income Approach

This is a “future value” approach that considers the value of potential future income based on current and past revenues. Appraisers use industry accepted formulas like Discounted Cash Flow to forecast future earning of the business.

Market Approach

The market business valuation approach is similar to the appraisal strategy used by Realtors and banks to establish property values. Appraisers develop Comparative Lists of sold companies in the same industry. Again, there are industry accepted methods including the Guideline Public Company Method, Guideline Company Transactions Method, and the Gross Revenue Multiple Method.

Business Valuation Specialists

Business Valuation Specialists, LLC has been advising and assisting medium sized business owners across the country with business valuations and business appraisals since 2003. Many of our appraisers have the Certified Valuation Analyst (CVA) designation through the National Association of Certified Valuators and Analysts (NACVA).

We pride ourselves on our “real-world knowledge.” We certainly understand and apply all the formal approaches and strategies, but we also know what it’s like to work in the trenches.  We are not afraid to dig in and find the hidden values of a business that others might miss.

For example, if you are a manufacturer, you likely have a knowledge base of proprietary information about certain processes that have a value far behind just the software you created. Everything you do to make a product has value and needs to be properly valued.  If you are a distributor, your customers and your intimate knowledge of their specific product requirements also has value. We'll work to find and establish how to value your company.

SOURCE: http://www.entrepreneur.com/article/207026

Tags: Business Valuation, Market Approach, Income Approach, Asset Approach

Breaking Down Business Valuation Components

Posted by Business Valuation Specialists LLC on Apr 24, 2015 1:22:00 PM

business valuation

As there are so many factors and aspects that comprise a business, there are also numerous aspects that go into a proper business valuation.  This presents a challenge when analyzing business valuations with the fact that it will have a large amount of information.  While the valuation will certainly be a lengthy document, it is important that certain components are well understood.

Before diving into the sections encompassing the asset, income, and market approaches of the business’s value, it is integral to understand the background that the appraiser presents as well as analyses of the business’s current state.  Initially, the appraiser will clarify the standard of value as well as the premise of value giving insight to the intended future of the company. Next, a description of the business should be provided that allows the reader to learn a brief history of the company in addition to pertinent information regarding the business’s value.

As the analyses in the business valuation are read, they are meant to deliver an understanding of how the business is faring with its operations, especially with comparing it to others in the industry. These analyses will help a reader determine if the company in question is performing well compared to historical operations as well as competitors in its field.  With these, detail is key, since the appraiser will be outlining how the environment of the economy affects this business currently and in the future. 

Once this groundwork of the valuation has been made and communicated, there are various methods that are implemented to give a value of the business.  First, the asset approach is used assuming that the buyer would not pay more for this business than it would cost them to replicate it on their own.  Common methods using this approach include the Adjustable Net Asset Value Method and Liquidation Value Method.

Second, the income approach determines a value that reflects the potential benefits and income a business will serve to produce in the future.  Common methods here include the Capitalization of Earnings Method and Discounted Earnings Method.

Last, the market approach derives a value from observing what other similar companies have been purchased and sold at while accounting for the difference between the company at hand and the companies the appraiser compares it to.  Frequently used methods for this approach include the Guideline Company Transactions Method, Guideline Public Company Method, and Multiple of Discretionary Earnings Method.

Between these three approaches and the methods within them, the calculated value of the business will differ. To balance these differences, the appraiser will then assign certain weights to each of the methods used based on how relevant they deem it to be to the business.  In conclusion, a final business valuation will result where the appraiser states the conditions that the business must perform to in order for this value to be worth it for a buyer to purchase the business.

Tags: Business Valuation, Market Approach, Income Approach, Asset Approach