Business Valuations And Consulting
The value of a business is based on
What it owns and What it earns.
What it owns
A business has tangible and intangible assets. The tangible assets are
the furniture, fixtures, equipment, inventory, and real estate. The intangible
assets can include the trade name, contracts, leases, client lists, licenses,
recipes, and patents.
What it earns
A business provides a certain financial benefit to the owner. The benefit
generally comes in the form of business profits and a salary to the owner.
It can also provide the owner with fringe benefits such as health insurance,
a company car, or a retirement plan.
How value is calculated
Owner operated businesses with sales of $1 million or less generally
sell for the value of the assets, plus one to three times the earnings.
If the earnings are stable and growing, the value is on the higher end.
If the earnings are variable or declining, the value is on the lower
Businesses with sales of $1 million to $10 million may sell for straight
earnings multiples of three to six. A thorough investigation of the financial
information is required to uncover the true earnings capability of the
business. Again, if the earnings are stable and growing, a higher multiple
is used. If the earnings are variable or declining, a lower multiple
Businesses with sales of more than $10 million often have specific industry
criteria, which may be applied to determine the value. At this level,
Buyers may be paying for market share, rights to patents and processes,
additions to product lines, or the benefits of strategic or administrative
Rules of thumb
Most industries have one of more rules or thumb. However, they can vary
widely and in most cases do not give an accurate value of a business.
Since each business is unique, a particular rule of thumb can be off
by as much as 100% or more. The business valuator will be able to decide
what is the most relevant information about a business and then make
an informed decision about its value.
The value of a business valuator
Business valuation is as much an art as a science. While the business
valuator does employ standardized formulas and methods to calculate value,
he works from assumptions that are based on his experience in the market
place and his familiarity with the similar businesses. This process includes
the selection of the most appropriate risk and return variables. In this
way, his applied expertise leads to the best calculations of value for
a specific business.
Please contact us with any questions
about buying or selling a business.
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