How To Value Your Business - Part Three

Now that we've talked about the "type" of value (Fair Market Value vs. Strategic Value) and introduced the three methods of valuing your business, let's look a little more at each method. In practice, we look at the cash flow method first, then the comparable-sales method, then last at the asset method - although frequently we only look at the first two methods and discard the asset method.

However, let's look at the comparable-sales method first - that's the easiest to understand and apply.

In the "Comparable Sales Method" (let's call it the Market Method), we look at what companies comparable to yours have sold for. We look at the sales price of the company as a function of revenues, EBITDA, or some other measure. Most commonly, it is a measure of revenue or sales. For example, we observe that most CPA accounting firms sell for 1.2 times revenues. Or, that most restaurants sell for 0.5 times revenues. We have large databases of sales data that we can correlate prices vs. specific elements.

This is also where you hear about "rules of thumb" - for example, "auto repair shops sell for 2 times revenue plus inventory" - etc.

The downside to the market method is that each company is unique, and a general rule of thumb may not apply to your business. At best, this method is used as a sanity check against other methods - the rule of thumb should be in a reasonable range of the value obtained from the other two methods of valuation. However, a rule of thumb should never be used as a primary determinant of value.  It's sort of like a home remedy - it may help in some cases, but you don't want to bet your life on it!

To learn more about valuing your business and how to apply the market method, please feel free to contact me.

B. Dane Byers, CPA, ABV, CFF
Partner
Bassett  & Byers, P.A.
3701 Lake Boone Trail Ste 201
Raleigh, NC 27607
(919) 303-1049
dbyers@bassettcpas.com