- Adjusted Book Value
- One of the least controversial valuation methods. It is based on the assets and liabilities of the business.
- Asset Valuation
- Often used for retail and manufacturing businesses because they have a lot of physical assets in inventory. Usually it is based on inventory and improvements that have been made to the physical space used by the business. Discretionary cash from the adjusted income statement can also be included in the valuation.
- Capitalization of Income Valuation
- Frequently used by service organizations because it places the greatest value on intangibles while giving no credit for physical assets. Capitalization is defined as the Return on Investment that is expected. In a nutshell, one ranks a lists of variables with a score of 0-5 based on how strong the business is in each of those variables. The scores are averaged for a capitalization rate which is used as multiplication factor of the discretionary income to arrive at the business' value.
- Capitalized Earning Approach
- Based on the rate of return in earnings that the investor expects. For no risk investments, an investor would expect eight percent. Small businesses usually are expected to have a rate of return of 25 percent. Consequently, if your business has an expected earnings of $50,000, its value might be estimated at $200,000 (200,000 * 0.25 = 50,000).
- Cash Flow Method
- Based on how much of a loan one could get based on the cash flow of the business. The cash flow is adjusted for amortization, depreciation, and equipment replacement, then the loan amount calculated with traditional loan business calculations. The amount of the loan is the value of the business.
- Cost to Create Approach (Leapfrog Start Up)
- Used when the buyer wants to buy an already functioning business to save start up time and costs. The buyer estimates what it would have cost to do the startup less what is missing in this business plus a premium for the saved time.
- Debt Assumption Method
- Usually gives the highest price. It is based on how much debt a business could have and still operate, using cash flow to pay the debt.
- Discounted Cash Flow
- Based on the assumption that a dollar received today is worth more than one received in the future. It discounts the business's projected earnings to adjust for real growth, inflation and risk.
- Excess Earning Method
- Similar to the Capitalized Earning Approach, but return on assets is separated from other earnings which are interpreted as the "excess" earnings you generate. Usually return on assets is estimated from an industry average.
- Multiple of Earnings
- One of the most common methods used for valuing a business. In this methods a multiple of the cash flow of the business is used to calculate its value.
- Multiplier or Market Valuation
- Uses an industry average sales figure from recent business sales in comparable businesses as a multiplier. For instance, the industry multiplier for an ad agency might be .75 which is multiplied by annual gross sales to arrive at the value of the business.
- Owner Benefit Valuation
- Computed by multiplying 2.2727 times the owner benefit.
- Rule of Thumb Methods
- Quick and dirty methods based on industry averages that help give a starting point for the valuation. While not popular with financial analysts, this is an easy way to get a ballpark on what your business might be worth. Many industry organizations provide rule of thumb methods for businesses in their industry.
- Tangible Assets (Balance Sheet) Method
- Often used for businesses that are losing money. The value of the business is based essentially on what the current assets of the business are worth.
- Value of Specific Intangible Assets
- Useful when there are specific intangible assets that come with a business that are highly valuable to the buyer. For example, a customer base would be valuable to an insurance or advertising agency. The value of the business is based on how much it would have cost the buyer to generate this intangible asset themselves.
