Business Valuations Continued...

As seen in the last blog, there are multiple reasons to have your business valued.  In the same way, many different methods exist to determine that value.  Through this blog, we will examine a few to see which one might be right for you.

The Income Approach measures the present worth of the future benefits of business ownership through two types of methods: the Discounted Future Returns method and the Capitalized Returns method.  The first is used when a business’s future returns can be reasonably estimated and will differ greatly year to year from the current returns.  Factors such as economic conditions or a change in business structure can cause these differences.  The Capitalized returns method is used when the future operations of the business are not expected to change greatly from current or when those future earnings are expected to grow at a predictable rate.

Next, the Market Approach assumes that a value can be assigned to a business based on the sale of comparable businesses.  This same method is used most commonly to value homes in the real estate market.  Because of the search for truly comparable companies and the use of detailed ratios, this method is a very time consuming and expensive option making it best for large, publicly traded companies.

Like the Income Approach, the Asset-based Approach has two applications: the Net Asset Value method and the Liquidation Value method.  When using the Net Asset method, all assets are adjusted to their fair market value to then determine the value of the business.  With the Liquidation Value method, the net proceeds available after liquidating business assets and paying off liabilities is then discounted to its present value to determine the value of the business.

There are many other ways to value your business.  The most common for small businesses is the Excess Earnings Approach.  This method first determines the value of all net tangible assets and adds a reasonable rate of return on those net tangible assets.  Next, the value of the businesses’ intangible assets is computed.  These two amounts are then added together to determine the value of the business. 

In all business valuations, it is important to remember that many factors come together to determine the final value that is assigned to the business.  Business valuations can be used as tools for business sales, estate planning, gift valuations, buy-sell agreements and more.  Contact our Firm if have a need to explore this subject further.

brad@mcarthurco.com
704.544.8429