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Valuing A Small Business - Searching For Market Value


Valuing A Small BusinessThere 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.

Bob KleinAbout 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.


Categories: BizBen Blog Contributor, Business Valuation Issues, How To Buy A Business, How To Sell A Business


Comments Regarding This Blog Post


I specialize in restaurants and bars, and many times a potential seller will want a valuation over the phone, and I do instruct them that rule of thumb methods are only so good, and that's important I see the business in person, and acquire more information about the business to see how much it is worth in today's market.


Bob Klein is very correct in saying that the valuation of a business is a complex process, relying on disparate factors that can vary considerably from one company to another, far more so than would be the case with the appraisal of commercial real estate.

At the end of the day, the reality is that a business has no sale value until it has a ready, willing, and able buyer. So the methods that Bob uses, that I use, and that other professionals use are designed to estimate as well as professional possible what this elusive, anonymous potential buyer would be willing to invest for the expected return.

One important caveat: for sellers and buyers who would like an accurate picture of what the actual market is, please consult a business sales specialist and not your attorney, accountant, financial advisor, or banker with no actual hands-on experience in orchestrating the very intricate process of business acquisitions and mergers.


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