There are three fundamental ways to measure what a business is worth:
Income Approach
Market Approach
Cost or Asset Approach
One business valuation approach is rarely considered in isolation from the others; rather, our appraisers apply the approaches most appropriate for the subject company and then reconcile the values to reach a final estimate of value. The appraiser must assess the relative strengths and weaknesses of the various valuation approaches that are used to determine how much weight should be placed on each approach.
The Income Approach focuses on the expected future benefits from investing in the business. This method can account for variable growth, capital expenditures, financing decisions and working capital needs. Historical data is used to create cash flow projections, which are converted into a single present value amount by utilizing a rate of return that an investor would require for assuming the risk associated with an investment in the company.
The market approach involves the application of pricing multiples based on similar transactions in the marketplace. The most common pricing multiples are P/E, as well as Revenue and Earnings multiples. At Allied Business Group, we perform research to identify similar closely held businesses that recently sold in the marketplace to derive pricing multiples. In applying these pricing multiples to the business, adjustments are often made to account for differences in investment characteristics, such as growth potential and relative risk.
This approach entails a restatement of the balance sheet by replacing the book value of assets and liabilities with their respective fair market values. This approach is frequently used in valuing holding companies or businesses that are significantly underperforming. It is often an inappropriate valuation approach for companies having significant intangible value. However, a cost approach may also be used to establish a floor value for a business using a liquidation method.
