Much has been reported recently about the record number of privately-owned businesses expected to be sold in the coming decade as baby boomers decide to cash-in and take their retirement. While this is a topic of great interest for business owners, there is little factual information publicly available on business transactions and there are a lot of misconceptions as to how businesses are priced. A general understanding of how businesses are priced by the financial markets is crucial to any business owner contemplating a sale. With a realistic valuation, the business owner can wait with confidence for the right offer. There are four basic approaches to valuation which Each of these methods have their strengths and, when calculated and considered all together, can provide a well-balanced approach to pricing a business.
THE FOUR APPROCHES TO VALUATE A BUSINESS:
- Multiple of Earnings Method
- Book Value Method
- Discounted Cash Flow Method
- Industry Comparable
Pricing businesses is more art than science. Just because a certain value is calculated using these methods does not make it so. We must take into consideration the mergers & acquisitions marketplace. Ultimately, a business is worth what someone else is willing to pay. To the extent that there are several potential purchasers and there are strategic benefits for these purchasers, the vendor is in a stronger position. What the calculated value does provide is an objective and widely accepted basis for establishing a price range from where the buyer and seller can negotiate without having vastly different conceptions of what the business is worth. In other words, it brings reasonable buyers and sellers together and increases the chances of concluding a successful transaction.