WHAT FORMULA DO YOU USE FOR VALUING A CERTAIN TYPE OF COMPANY?
There is not just one formula. A business valuation is not a one-size-fits-all procedure. Businesses in the marketplace will have different values for different reasons—and will appeal to different types of buyers. For the purpose of selling a business, you need a certified business evaluation. (Probating an estate, divorce proceedings, and partnership agreements may require different types of valuations.) Here are four different types of buyers:
An industry buyer will not give much value to the furniture, fixtures, equipment, and/ or location of a business. The industry buyer is interested primarily in the client base. The value to this buyer will be below the normal perception of market value. An industry or other asset-focused buyer predictably will perform an analysis of transferable assets, which may be comparable to book value.
A financial buyer and her or his advisors will review historic financial performance in an effort to obtain a level of comfort with regard to the probable earnings levels available for the new owner’s salary, acquisition debt service, and replacement reserves.
A sophisticated buyer and his or her advisors will use various methods to determine the amount of earningS AVAILABLE FOR THE transaction. Both their review of historic results and their perception of the opportunity will favor their conclusions. (Projections also are taken into account, and an owner/manager’s salary is deducted from Discretionary Earnings.)
A strategic buyer typically pays the most for a company and is motivated by the future earnings potential of the business. The strategic acquirer buys for reasons that may not be purely economic.
