Methods of Valuing a Business

Methods of Valuing a Business

There is no correct price for a business. Valuing a business is always an imprecise science, even with large-cap public companies. In this first part of a two part article on valuation methods, we look at the asset-based approach & comparison-based techniques. The right price is one that a willing buyer is prepared to pay and a willing seller is prepared to receive. Value is to a large extent dependent upon who is doing the valuing and for what purpose: for example, a distributor of electrical goods may find that the business is of more value to a related manufacturer than to an unrelated buyer. An industrial manufacturer with five solid customers is likely to fetch a lower price than a similar-size competitor with 50 outlets because its revenue source is less diversified. I would be surprised if you did not value your family business differently for estate purposes versus a sale of the business. Sellers are understandably nervous about earn-out deals not only because of the uncertainty of delivering pre-agreed profit targets for usually the next two years but also because of the concern that the purchaser may hamper profit achievement.

1. Asset-based approach. Assessing the book value is the easiest way to value a business. It will more often than not, however, produce the lowest valuation...

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Other areas covered are

Comparison based valuations
Price earnings ratio basis of valuation
Further examples of it being used in a business context
A working example
A critique of the method

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