Business valuations are performed using a methodology similar to the process for real estate appraisals. However, in business valuation, the data sources are different. Further, there are nuances in the form of analysis.
Reasons for business valuation engagements include the following:
estate tax valuation and planning
business purchase price allocation;
research to determine the asking price for a business;
documentation that a purchase price is equitable.
Options for business valuation include :
Multiple of revenue — the revenue multiplier varies from industry to industry and with the size of the business. The appraiser compiles data for similar types of businesses with similar levels of sales and determines the business valuation based upon industry rules of thumb, features for the subject property, and comparable sales and data for the sales.
Comparable sales — the appraiser seeks information for similar businesses that sold recently including revenues, net profits, assets, liabilities.
Cash flow/income approach/earnings-based methods — options include a discounted cash flow analysis and a multiplier of net income (typically net income before interest, taxes, depreciation, and amortization, sometimes referred to as EBITDA).
Asset-based valuation — this business valuation method is a hybrid of the net value of assets plus a multiplier of annual cash flow. The multiplier is typically relatively low since it is added to the asset value.
Methods for business valuation vary with the type of business. Mid-market to large businesses are more likely to sell based upon a multiplier of EBITDA. Smaller businesses are more likely to sell based upon a multiplier of revenue or an asset-based valuation methodology. The success and outlook for the business also affect the business valuation method and multiplier. A business with poor recent financial results and uncertain future prospects is more likely to sell based upon assets than on a multiple of revenue or EBITDA. A successful mid-market business with steadily growing revenues and net profits would be more likely to sell for a multiple of EBITDA.
O’Connor and Associates is the largest independent appraisal firm in the southwestern United States and has over 40 full-time staff members engaged full-time in business valuation and market study assignments. Their expertise includes business valuation, commercial and single-family real estate appraisals, business personal property valuations, the purchase price for business allocations, property tax appeals valuations, partial interest valuation, estate tax valuation, expert witness testimony, and valuation for condemnation. They have performed over 20,000 appraisals since 1988.