Business Broker Services, Inc. FAQ page.
This question was received from an Accountant
What formula do you use for valuing a certain type of company? My standard answer to any of these types of questions is: what formula? Businesses in the market place will have different values for different reasons and will appeal to different types of buyers. Thus the need for a Certified Business Evaluation. (this excludes valuations for divorce, partnerships, probate – )
- An industry buyer will not give much value to the furniture, fixture, equipment and/or the location. They will primarily be interested in the client base. Therefore their value will be below our perception of market value. Industry and other asset focused buyers predictably will perform an analysis of the value of transferable assets which might be compared to book value.
- Financial Buyer: Buyers and their advisors will review historic financial performance in an effort to obtain a level of comfort as to probable earnings levels available to them for: a salary for the new owner, acquisition debt service and, replacement reserves.
- Sophisticated Buyer: Buyers and their advisors will use various methods in determining the amount of earnings available for the transaction. A review of historic results and their perception of the opportunity will favor their conclusions. Note that projections are taken into account and an Owner/Manager’s wage is deducted from Discretionary Earnings (Adjusted EBITDA).
An example of an evaluation:
Our company performed an evaluation on an alarm company – the evaluation favored the sophisticated buyer. The range of value was from $900,000.00 to 1.8 million. However, the company had the exclusive territorial rights to certain products that came from a very distinguished manufacturer. The business WAS marketed to Strategic Buyers and sold for just under $3M. Therefore, when we receive inquiries on certain businesses we are ahead of the game in understanding what the actual offer will be from various types of buyers.