There are different valuation methodologies that a valuer may use depending on the specific of the business and the purpose of the valuation.
A Business Valuation expert will consider multiple valuation methodologies for the circumstances, however the more commonly used techniques for valuing smaller and medium sized companies are:
Capitalisation of Earnings Method
This method involves the multiplication of an Earnings figure by an appropriate Capitalisation Rate. Earnings are the assessed profits that can be derived by the business and excludes any one off items. Depending on the circumstances, the Earnings may be based on
- EBIT – Earnings Before Interest and Tax and its derivations EBITA (EBIT before Amortisation) and EBITDA (EBIT before Depreciate and Amortisation)
- PEBIT – Proprietors EBIT is EBIT before owner salaries and other benefits
- Profit after Tax – used in listed company analysis as part of a price earnings ratio
Generally, a multiple of EBIT (or EBITA, EBITDA) is more common than either PEBIT or Profit After Tax. A PEBIT based Earnings is generally more suitable for very small businesses.
Market Value Method
The Market Approach is based on an analysis of the price of similar businesses in the market. The performance of the subject business is compared to other businesses and then a set of appropriate multiples are developed to be used in the valuation.
Discounted Cash Flow Method
An analysis of the net present value of the projected cash flows of a business (or Discounted Cash Flow Method) is a valuation technique based on the premise that the value of the business is the net present value of future cash flows. It requires an analysis of revenue, expenses, investment (cash balances, working capital movements, capital expenditure budgets), capital structure and cost of capital, and the residual remaining at the end of the forecast period.
Properly determining the value of a business is a complicated process. Consult with a professional business valuation expert that has technical and business experience, the ability to select the appropriate valuation techniques, and a thorough understanding of today’s tax laws, finance and market conditions. An unbiased business valuation serves as a benchmark, minimizes ownership disputes and provides a realistic, credible and defendable valuation for any business owner.
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