Considerations When Performing a Business Valuation
Considerations in Determining Value
There are many things that go into valuing a business. We like to say that the endeavor of business valuation is “part science and part art”. The science is usually a fairly objective pursuit involving crunching numbers and cash flow multiples etc. Whereas, the “art” part is often a partially subjective endeavor where experience, opinion, and the “eye of the beholder” comes into play. With that being said, here is a short list of items that we take into consideration when performing a business valuation.
· Seller’s discretionary earnings (SDE)/cash flow: Sum of the benefits that the business accrues to the owner(s). (Net income + owner’s compensation + fringe benefits etc.)
· Market Value of tangible assets: furniture, fixture, & equipment
· Value of intangible assets: reputation, goodwill, copyright, IT, etc.
· Comparable sales: What are buyers/investors paying for this type of income stream? What multiple of SDE are businesses like this being transacted at?
· Replacement value: What would it cost to replace the income producing capability of the enterprise?
· Marketability factor: How desirable is the business? Is it catering to a “hot” demographic?
· Market segment: Business to business? Business to consumer?
· Territory rights: Exclusivity? Competitive environment?
· Do you know how buyers will value your business?