Owning a business


Business Valuation Appraisal

Paul Cronin

Paul Cronin

January 20, 2024 ⋅ 3 min read

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Business valuation appraisals involve the process of determining the economic value of a business. This is a crucial step in various situations, such as selling a business, mergers and acquisitions, estate planning, legal disputes, and obtaining financing. The approach to business valuation can vary, but the following are common steps and methods used in business valuation appraisals:

Engagement and information gathering

  • The process typically begins with an engagement between the business owner and a qualified valuation professional or firm.

  • The valuator gathers extensive information about the business, including financial statements, tax returns, contracts, customer data, industry trends, and other relevant documents.

Selecting valuation methods

  • Valuators often use a combination of different valuation methods to arrive at a comprehensive and well-supported valuation.

  • Common valuation methods include the Income Approach, Market Approach, and Asset-Based Approach.

Income approach

  • Discounted cash flow (DCF):This method involves estimating the future cash flows the business is expected to generate and discounting them to present value. DCF considers the time value of money and the risk associated with future cash flows.

  • Capitalization of earnings: This method involves applying a capitalization rate to the expected future earnings to determine the present value.

Market approach

  • Comparable company analysis (CCA): This method involves comparing the subject company to similar publicly traded companies. Key financial metrics and multiples are used for comparison.

  • Precedent transaction analysis: Similar to CCA, this method involves comparing the subject company to businesses that have recently been sold.

Asset-based approach

  • Book value: This approach considers the net value of the business's assets minus liabilities as reported on the balance sheet.

  • Adjusted net asset value: Adjustments may be made to the book value to reflect the fair market value of assets, especially when book values do not accurately represent market conditions.

Normalization adjustments

  • Valuators often make adjustments to financial statements to normalize earnings and expenses. This includes accounting for non-recurring expenses, owner's perks, and other one-time items.

Discounts and premiums

  • Discounts for lack of control and lack of marketability may be applied in certain situations.

  • Premiums, such as a control premium, may be considered if the valuation is for a controlling interest.

Final valuation report

  • The valuation professional compiles all the analysis and findings into a comprehensive valuation report.

  • The report outlines the methods used, assumptions made, and the final determined value of the business.

It's important to note that business valuation is both an art and a science. The valuator's judgment, experience, and knowledge of the industry play a significant role in the process. Additionally, the purpose of the valuation and the specific characteristics of the business can influence the choice of methods and the final valuation result. Working with a qualified valuation professional is crucial to obtaining an accurate and well-supported business valuation.