Valuation Methods

What valuation methods are best to value your business?

The truth is there is no simple answer to the question. Anyone who states that your business should be worth a multiple of its cash flow doesn’t have enough valuation experience to identify the true market value of your company.

The best way to value your company depends on a number of factors, including:

  • Industry
  • Business type (Business to Business, Business to Consumer or both)
  • Reoccurring or non-reoccurring income
  • Tangible and intangible assets.

Note* Only a company that is in the business of actually executing business sale transactions will be able to calibrate their valuation findings to determine the “true” market value of your company.

Valuation Methods

What are some different business valuation methods?

  • Discounted Cash Flow Method – The discounted cash flows analysis is an income method to valuation wherein the total fair market value of the business entity is calculated by discounting projected future cash flows back to the date of valuation. At the end of the projection period, a residual or terminal value is calculated and discounted to its present value at the date of valuation.
  • Projected Earnings Method – To determine an appropriate method for forecasting future earnings, the first step is to identify the adjusted debt-free after-tax earnings for the previous 4-5 years and calculate the annual growth rate percentage to be used for the projections.
  • Capitalization of Earnings Method – The capitalization of earnings method values the business based on an expected stream of earnings (cash flow) capitalized by a risk-adjusted rate of return. The capitalization of earnings method is used primarily to value businesses whose earnings are expected to remain stable and whose value is based on its projected earnings stream.
The steps involved in using the capitalization of earnings method are:

  1. Estimate the business’s pro-forma sustainable earnings.
  2. Determine the appropriate capitalization rate.
  3. Capitalize the sustainable earnings into an operating value.
  4. Adjust for non-operating assets and/or liabilities, premiums and discounts to determine the fair market value for the entity at the date of valuation.

It is important to remember that in addition to analyzing the earnings of a business, additional value is placed on the tangible and non-tangible assets of the company. Examples of non-tangible assets include:

    • Patents and trademarks
    • Exclusive supplier or customer contracts
    • Barriers to entry in the market

How does Pavilion value your company?

Our in-house team of certified and accredited business valuators utilize over 20 different business valuation methods to find the most appropriate for your business. We also utilize our in-house database to analyze recent and historical / precedent business transactions in your industry and size of business to determine what the market is currently paying for a business like yours.

To learn more about business valuations and how to determine the fair market value of your company, Contact Us or call 1-888-859-5388 for more details.

Valuation Methods