There are a number of standard appraisal methods used to value a business that include, Asset approach, Income approach, Market approach (Comps), Capitalization of Earnings and Discounted Future Earnings. Each one of these methods individually does not always represent the true value of a business. We have seen appraisals where the derived value of these five different approaches varied by 500%.
Also used are Rule of Thumb values based on multiples of adjusted profits or percentages of gross sales. The rule of thumb methods only work when there are many similar businesses having the same operating expenses and assets. This doesn’t always happen and when you use the method on more unique businesses it just doesn’t work.
Using Comps tends to give the average value of the compared businesses and not the value of the business being appraised.
Capitalization of Earnings and Discounted Future Earnings are less often used and tend to end up with values far from Market Value.
After working with the standard methods for some time and evaluating what creates value in a business we learned that combining the Asset, Income and adding market influences into a single method gave an accurate market value. Having been involved with our own Business Brokerage for over twenty years we were also able to look at the businesses we sold and adjust and refine the combined method to reflect a True Market Value Appraisal.
About The Author: Bob Klein is President and owner of Business Appraisals, providing Market Value business appraisals on all types of businesses. Phone Bob direct at 800-829-4842 or 949-254-4062 about more information regarding business valuations.