| Small Business Valuation |
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Except for real estate related businesses, small business’s valuation is a function of the earnings rather than the assets. The following factors influence business valuation: the number of years in business, number of employees, the amount and condition of the equipment, facilities, supplies and inventory, the type of customers, customer loyalty and the stability of earnings. In the service industry patents, technologies, intellectual property, brand name, and web assets also contribute to business valuation.
Like goodwill there is no one formula to determine the value of a company. However, there are three basic methods of business valuation: Asset Based Business Valuation Method
The business valuation is derived from the value of the asset in the existing condition. If the earnings do not support a value greater than the assets, then at best, business valuation equals the value of the tangible assets.
Market Business Valuation Method The market business valuation method calculates a company’s value from a ratio of various factors including the earnings, sales and/or assets of past transactions of similar businesses. These ratios or factors are then applied to the company’s sales, earnings and/or assets.
The market business valuation method calculates a company’s value from a ratio of various factors including the earnings, sales and/or assets of past transactions of similar businesses. These ratios or factors are then applied to the company’s sales, earnings and/or assets. Income Business Valuation Method
The income business valuation method converts the level of earnings into a value using a capitalization rate, discount rate or multiple.
EBITDA x (multiplier for industry) + (value of the net liquid assets) |