Models Used in Business Valuation

Immediately after hiring a business broker San Diego, the first thing he will do is perform a business valuation. The purpose of a valuation is to help determine the actual value of the business before listing it. The valuation report can at times be used to identify the fixable flaws that a business may have. The business owner can then fix those flaws before listing the business. Every valuation expert will use his own unique valuation method. Here are the main valuation models used.

Industry based valuation
With this option, the value of a business is calculated based on the pricing guidelines of the industry that it belongs to. For example, a fast food business can be historically valued based on 40% of the annual revenue. Motels, on the other hand, will be valued based on a set price of $20,000 per room. Every industry is different. A lot of research is needed to discover the industry rules and formulas. The best news is that business brokers San Diego have this information on their fingertips and will provide you with a thorough business valuation.

Comparable business based evaluation
With this option, the valuation expert looks at the businesses that are similar to your business. By looking at comparable businesses, the valuation expert is able to determine the potential worth of your business. Needless to say, this method is not always accurate more so when you consider the fact that no one business is exactly the same as another. Several factors have to be considered such as location, customers, tools and equipment. This method is not used to get a specific value of a business. It simply gives a ballpark figure.

Asset based valuation
This method will give a very good idea of how much your business is worth. With this option, your business broker San Diego will consider both the tangible and intangible assets. Appreciation rates will also be accounted for. For this method to work, you have to add the value of the total business assets and subtract the liabilities. You should note that when using this method, financial advisors only consider the minimum the assets can be sold for.

Asset liquidation based valuation
This model considers the amount of money that the business owner would get if he sold all the tangible assets in an open market. This method is normally considered when a business owner wants to close his business for good. It is less effective if you want your business to continue operating. It doesn’t account for the intangible assets like customers, goodwill and branding.

Other common methods worth mentioning are entry/start-up costs, discretionary income based valuation, price/earnings ratio valuation, discounted cash flow, multiplier valuation by sales, and multiplier valuation by profits. A good valuation expert will combine several valuation models to get a more accurate figure.

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