How we determine the value of your company:
In most cases, we use the highest outcome of three standard approaches: the Income Approach, the Market Approach, and the Asset Approach.
The Income Approach
The Income Approach values your company based on the present value of all future expected earnings. First, we determine the appropriate amount of annual earnings an investor would expect to receive from your business, then we determine the appropriate required rate of return, and then discount the future earnings to present day value. In determining the rate of return, we consider many factors, including: industry, size, balance sheet quality, customer concentration, growth expectations, etc.
The Market Approach
In the Market Approach, we collect data from companies in the same industry and size range as your company which have recently sold. We compute means and medians of the Price/Sales ratios and Price/Operating Income ratios from the companies in the group. Then we apply those ratios to your company's data to determine its value based on those previous transactions.
The Asset Approach
The Asset Approach usually establishes a minimum value for your company. It is based on the approximate fair market value of your company's tangible and financial assets. It does not account for the potential goodwill value of your business created by it's sales history or income producing capacity.
All of the values arrived at by these methods are adjusted for working capital (current assets less current liabilities), excess assets (assets not needed to produce income) and long term liabilities. The result is the value of the equity in your company. See our SAMPLE BUSINESS VALUATION REPORT for a more detailed explanation.