There are a number of traditional accounting methods used to calculate business worth. None of these methods individually addresses all of the items that create value. One method looks at assets/liabilities while another will look at cash flow or market comps, each separately. It is not uncommon to see five different methods used for an appraisal, each being weighted or one being picked as the proper method with out any logical or statistical justification.
During my 23 years as a Business Broker and president of Business Appraisals I found that blending three of these different methods into one appraisal method captures all elements of a business that have value.
First I look at the P&L statement and cash flow. Adjustments are made in the form of add backs which, depending on the purpose of the appraisal reflect the cash flow of the business before discretionary spending of the owner/owners. A multiple that is statistically based on 25 years of business sales and appraisals is used to determine the cash flow value of the business.
Second I look at the Balance Sheet and the net worth (asset/liabilities). Again, adjustments are made based on the purpose of the appraisal. Book value is adjusted to reflect market value for equipment and real estate.
The third part of this appraisal process look at market conditions that reflect value, such as sales growth or decline, customer percentage of gross sales, profit margins and other market influenced items as needed.
All of this is then presented in a concise logical form with a description for each step in the process, giving the user a clear, understandable, accurate and affordable business appraisal.
About The Author: Bob Klein is President and Owner of Business Appraisals, providing California business owners and business buyers business appraisal services on all types of businesses. Bob Klein can be reached direct at 949-254-4062.
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