The value of a business is based on two things:
what it owns and what it earns.
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A business has tangible and intangible assets (goodwill). The tangible assets are the furniture, fixtures, equipment, inventory, and real estate. The intangible assets may include the trade name, contracts, leases, client lists, licenses, recipes, telephone numbers, website, patents, etc.
A business provides a certain financial benefit to the owner. The benefit generally comes in the form of business profits and, a salary to the owner. It may also provide the owner with fringe benefits, such as: health insurance, a company car, or a retirement plan.
Owner operated businesses with sales of $1 million or less generally sell for the value of the assets, plus a multiple of the earnings. If the earnings are stable and growing, the value is on the higher end. If the earnings are variable or declining, the value is on the lower end.
Businesses with sales of $1 million to $10 million generally sell for straight earnings multiples which may be dependent on the industry. A thorough investigation of the financial information is required to uncover the true earnings capability of the business.
Businesses with sales of more than $10 million often have specific industry criteria, which may be applied to determine the value. At this level, buyers may be paying for market share, rights to patents and processes, additions to product lines, or the benefits of strategic or administrative consolidation.
Most industries have one or more rules of thumb. However, they may vary widely and, in most cases, do not give an accurate value of a business. Since each business is unique, a particular rule of thumb can be off by as much as 100% or more. Our team of professional, experienced business valuators are able to decide what is the most relevant information about a business then, make an accurate, informed decision about the value of the business.
Business valuation is as much an art as a science. While business valuators do employ standardized formulas and methods to calculate value, they also work from assumptions that are based on their experience in the market place and, their familiarity with similar businesses. This process includes the selection of the most appropriate risk and return variables. In this way, the applied expertise of the valuator leads to the best calculations of value for a specific business.