Business Valuation Blog | Understanding Buying / Selling a Company

Approaches and Methodologies Considered When Appraising Your Business

Posted by Business Valuation Specialists LLC on Jan 3, 2022 7:00:00 AM

Business Valuation Appraisal Methodologies Appraiser

Business owners likely have particular ideas about the value of their company and how best to calculate it, given their experience and knowledge of their financial history, and understanding of the market and industry in which they operate. When you need to formally engage an experienced, certified business appraiser to value your company, it's important to understand the standard accepted approaches they consider and weigh during the process.

There are three approaches to business valuation, namely the Income Approach, the Market Approach, and the Asset Approach. Each of these methodologies can be broken down further and considered based on the type of business you own, available data to analyze, and the company’s current operational status. Here is a brief summary:

Income Approach

The income-based approach has two primary methods that take into account whether the business income is steady or inconsistent. Essentially, the company's income is measured over a period of time to determine its overall value. Under a “Capitalization of Earnings” approach, the appraiser will consider both historic and future income probability, based on a steady stream of revenue, and discount these streams to realize a net present value, while using appropriate rates of capitalization.

Under the “Discounted Future Earnings” approach, the appraiser will estimate value primarily from future income probability, or forecasts, over a fixed period of time, to a terminal value, and discount this back to the present

Market Approach

>The Market Approach determines business value where the subject company being appraised can be compared to available businesses traded in the public marketplace. Adjustments are made to better match the private business based on revenue and overall size.

These guidelines are either investor-driven or transactional, depending on the data available. For example, a similar publicly-traded company may have available the price investors paid for minority interests in that company. This can then be adjusted to match the subject private business profile.

Other methods which take components of both the income and market approach are the “Multiple of Discretionary Earnings” and “Gross Revenue Multiple” which consider the actual income of the business being appraised and apply a market-derived multiple to these earnings based on available public data.

Asset Approach

As a general rule, the asset approach is considered and primarily weighed when a business is operating at a loss or has shut down temporarily or permanently. The options available to the appraiser under this approach are as follows:

Adjusted Net Asset Value: Under this methodology, the appraiser will adjust the company's tangible assets based on an estimate of Fair Market Value, while taking into account existing liabilities.

Liquidation Value: If the business has permanently ceased operations, and a compulsion to sell the remaining assets is the only remaining option, the value of the assets is measured under an Orderly or Forced Liquidation premise.

Book Value: This method relies solely on the net book figures of the assets recorded on the company’s books, without adjusting to market or liquidation value. Given accounting depreciation methods are usually accelerated, this will likely lead to undervaluing the assets.

Excess Earnings: This method takes into account the historic earnings of the company and provides a broad way to measure intangible asset value as well as tangible, by estimating the goodwill of a business along with personal property, equipment, improvements buildings, and land. This is generally preferred for fully operational companies with a lot of tangible assets.

By gaining a better understanding of these valuation methods, you will be able to work together with your certified, experienced business appraiser, in a successful fashion, to properly appraise your company.

Tags: business appraisal, small business valuation services, business valuation methods, small business valuation methods, Business Valuation Methodologies

Business valuation methods: What are Asset-based approaches?

Posted by Business Valuation Specialists LLC on Oct 26, 2015 1:00:00 PM


Asset approaches are one of the three basic methods that business valuation firms use when taking the value of a company. While the approach sounds simplistic, there is more to an asset-approach than simply tallying up the physical property owned by the business. To get the most from your company valuation, learn what an asset approach really entails. 

What is an asset approach to company valuation? 

An asset approach looks as the physical and intangible assets of your business in the present time. For example, a business appraiser might tally the dollar value of sinks, chairs, tools, and furniture when performing a business appraisal of a hair salon. 

As part of the asset approach, a business valuation firm will compare the assets of your business to similar businesses. One fundamental tenet of pricing is that a commodity like a business is worth at most only what the market will bear. This means that you can set whatever price you want for your business, but it is only really worth the highest price that a buyer will pay. You might have estimates on what the value of the assets are worth.  One option is to get a certfied machinery and equipment appraisal completed on the assets to know what they are actually worth.

How does an appraiser determine the value of company assets? 

Other appraisals may also be worthwhile such as real property if the business owns land and buildings.  Other assets may need to be adjusted such as aged receivables that may never get collected. A valuation firm will also review any business liabilities, such as outstanding debts.

An asset approach can be particularly useful to contextualize the business value for the owner or partners. Oftentimes, business owners have their own internalized idea of how much their business is worth that is partially informed by emotions. Asset approaches are often used when companies are losing money since there is not any positive goodwill created in a failing company.

If an owner is planning to retire and sell a small business, be it a bicycle store or a hair salon, he or she might have a price point that is not in line with what the market will bear. By seeking a company valuation before putting the business on the market, the owner can receive a reality check on what they can expect to sell their business in the present time. An owner may decide to hold onto the business until the market favors a higher approach, invest in infrastructure improvements that will increase the business value, or accept a lower offer if the time is right to sell. 

Before you sell your business, auction off used equipment, or seek a partner, get an independent evaluation of your business's worth.  A business valuation firm can offer an appraisal for companies that need the question of "What is my business worth?" answered.

Tags: Asset Approach, business valuation methods