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BUSINESS
VALUATION METHODS
BOOK
VALUE BUSINESS VALUATION METHODS: The
book value is simply the business valuation based upon the
accounting books of the business. Assets less liabilities equals
the owners equity, which is the "Book Value" of the
business. The problem with book value business valuation is that
the accounting records may not accurately reflect the true value
of the assets in the business valuation.
ADJUSTED
BOOK VALUE BUSINESS VALUATION METHODS: Your MBA performs two types of adjusted book value
business valuation: Tangible Book Value and Economic Book Value
(also known as book value at market).
Tangible
Book Value
business valuation is different than book value in that it deducts
from asset value intangible assets, which are assets that are not
hard (e.g., goodwill, patents, capitalized start-up expenses and
deferred financing costs).
Economic
Book Value
business valuation allows for a book value analysis that adjusts
the assets to their market value. This business valuation allows
valuation of goodwill, real estate, inventories and other assets
at their market value.
INCOME
CAPITALIZATION BUSINESS VALUATION METHODS: First you must determine the capitalization rate - a rate of return
required to take on the risk of operating the business (the
riskier the business, the higher the required return). Earnings
are then divided by that capitalization rate. The earnings figure
to be capitalized should be one that reflects the true nature of
the business, such as the last three years average, current year
or projected year. When determining a capitalization rate you
should compare with rates available to similarly risky
investments.
DISCOUNTED
EARNINGS BUSINESS VALUATION METHODS: This determines the value of a business based upon the
present value of projected future earnings, discounted by the
required rate of return (capitalization rate). Usually, the
question is how well earnings are projected.
DISCOUNTED
CASH FLOW BUSINESS VALUATION METHODS: Is a business valuation method best used to conduct a
business valuation on an entity established for the purpose of
fulfilling a specific project, in certain startup and other
companies where cash flow is more important than net income, and
when a certain time frame is set where an investor wishes to see
his investment returned over a specific period of time. In
discounted cash flow, the present value of liabilities is
subtracted from the combined present value of cash flow and
tangible assets, which determines the value of the business.
PRICE
EARNINGS MULTIPLE BUSINESS VALUATION METHODS: The price-earnings ration (P/E) is simply the price of a company's
share of common stock in the public market divided by its earnings
per share. Multiply this multiple by the net income and you will
have a value for the business. If the business has no income,
there is no business valuation. If the common stock in not
publicly traded, business valuation of the stock is purely
subjective. This may not be the best method, but can provide a
benchmark business valuation.
DIVIDEND
CAPITALIZATION BUSINESS VALUATION METHODS: Since most closely held companies do not pay dividends,
when using dividend capitalization valuators must first determine
dividend paying capacity of a business. Dividend paying capacity
based on average net income and on average cash flow are used. To
determine dividend paying capacity, near term capital needs,
expansion plans, debt repayment, operation cushion, contractual
requirements, past dividend paying history of a business and
dividends of a comparable company should be investigated. After
analyzing these factors, percent of average net income and of
average cash flow that can be used for the payment of dividends
can be estimated. What also must be determined is the dividend
yield, which can best be determined by analyzing comparable
companies. As with the price earnings ration method, this usually
produces a subjective result.
SALES
MULTIPLE BUSINESS VALUATION METHODS: Sales and profit multiples are the most widely used business valuation
benchmarks used in valuing a business. The information needed are
annual sales and an industry multiplier, which is usually a range
of .25 to 1 or higher. The industry multiplier can be found in
various financial publications, as well as analyzing sales of
comparable businesses. This method is easy to understand and use.
The sales multiple is often used as the business valuation
benchmark.
PROFIT
MULTIPLE BUSINESS VALUATION METHODS: Profit and sales multiples are the most widely used business valuation
benchmarks used in valuing a business. The information needed are
pretax profits and a market multiplier, which may be 1, 2, 3, or 4
and usually a ceiling of 5. The market multiplier can be found in
various financial publications, as well as analyzing the sale of
comparable businesses. This business valuation method is easy to
understand and use. The profit multiple is often used as the
business valuation ceiling benchmark.
LIQUIDATION
VALUE BUSINESS VALUATION METHODS: This type of business valuation is similar to an adjusted
book value analysis. Liquidation value is different than book
value in that it uses the value of the assets at liquidation,
which is often less than market and sometimes book. Liabilities
are deducted from the liquidation value of the assets to determine
the liquidation value of the business. Liquidation value can be
used to determine the bare bottom benchmark value of a business,
since this should be the funds the business may bring upon
business valuation.
REPLACEMENT
VALUE BUSINESS VALUATION METHODS: This type of business valuation is similar to an adjusted book value
analysis. Replacement value is different than liquidation value in
that is uses the value of the replacement value of assets, which
is usually higher than book value. Liabilities are deducted from
the replacement value of the assets to determine the replacement
value of the business.
LEVERAGED BUYOUT VALUATION:
LBOs are takeovers of companies using borrowed funds and private
equity. Typically, the target company's assets and cash flow
serve as support for the funding taken out by the acquirer,
which repays the debt out of cash flow and asset disposals of
the acquired company.
TRUE
VALUE BUSINESS VALUATION:
Is the amount that a buyer is finally willing to pay.
VALUATION
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