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Business Valuation / Business Enterprise Appraisals

Business valuations are performed using methodology similar to the process for real estate appraisals. Types of values for a business valuation include market value, liquidation value, hypothetical value, prospective value and retrospective value. However in business valuation, the data sources are different. Data utilized in preparing a business valuation include comparable sales data, discount rates applied to projections of cash flow and multiples of earnings. While real estate appraisers use the same types of data for real estate, the quality and quantity of available data is much greater for real estate and for business valuation. Real estate appraisers can visually observe the physical condition and location of a parcel of real estate. Business valuation appraisers cannot observe the physical condition of a business and in many cases its location is not a material factor. Further, there are nuances in the form of analysis. Business valuation appraisers frequently utilize multiple of revenue as a key metric. Real estate appraisers infrequently use gross rent multiplier. Asset base valuation is often utilized in business valuation. It considers factors such as the market value of inventory, business personal property, real estate and intangible personal property such as accounts receivable. Real estate appraisers do not frequently consider these issues other than the market value of the real estate.

Reasons for business valuation engagements include the following:

  1. estate tax valuation and planning
  2. business purchase price allocation;
  3. divorce;
  4. loan documentation;
  5. litigation;
  6. research to determine the asking price for a business;
  7. documentation that a purchase price is equitable.

Options for business valuation include :

  1. Multiple of revenue -- the revenue multiplier varies from industry to industry and with the size of the business. The appraiser compiles data for similar types of businesses with similar levels of sales and determines the business valuation based upon industry rules of thumb, features for the subject property and comparable sales and data for the sales. Determining which multiple is appropriate for a business requires quality data, consideration of the characteristics of the subject business and judgment of the appraiser. Compiling a meaningful quantity of in-depth, accurate data regarding the revenue multiplier for similar businesses which recently sold is the most critical element in applying this valuation technique. Implicit to effectively performing this process is a keen understanding of the metrics considered meaningful for the relevant type of business by both buyers and sellers.
  2. Comparable sales -- the appraiser seeks information for similar businesses which sold recently including revenues, net profits, assets, liabilities. Appraisers utilize a variety of sources to compile data regarding the sale of public and private companies. Comparable sales data is often used to develop metrics utilized in other approaches to valuing a business. For example, the revenue and sales price can be utilized to develop data used in the multiple of revenue analysis.
  3. Cash flow/income approach/earnings based methods -- options include a discounted cash flow analysis and multiplier of net income (typically net income before interest, taxes, depreciation and amortization, sometimes referred to as EBITDA).
  4. Asset based valuation -- this business valuation method is a hybrid of the net value of assets plus a multiplier of annual cash flow. The multiplier is typically relatively low since it is added to asset value. Net asset value includes the market value of real estate, business personal property, accounts receivable, inventory and other salable assets less any liabilities

Methods for business valuation vary with the type of business. Appraisers evaluate the options and typically focus most of their effort on the method used most typically by buyers and sellers of businesses. Mid-market to large businesses are more likely to sell based upon a multiplier of EBITDA. Smaller businesses are more likely to sell based upon a multiplier of revenue or an asset based valuation methodology. The success and outlook for the business also affects the business valuation method and multiplier. A business with poor recent financial results and uncertain future prospects is more likely to sell based upon assets than on a multiple of revenue or EBITDA. A successful mid-market business with steadily growing revenues and net profits would be more likely to sell for a multiple of EBITDA.

O'Connor and Associates is the largest independent appraisal firm in the southwestern United States and has over 40 full-time staff members engaged full-time in business valuation and market study assignments. Their expertise includes business valuation, commercial and single-family real estate appraisals, business personal property valuations, purchase price for businesses allocations, property tax appeals valuations, partial interest valuation, estate tax valuation, expert witness testimony, and valuation for condemnation. They have performed over 20,000 appraisals since 1988.

To obtain a quote or further information regarding an appraisal of a business, contact Larry Brewster (713-686-9955).


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