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How a Business is Valued
Valuing a business or ownership interest in
a business is a complex
process. Much thought and analysis must go into completing a valuation,
if the appropriate conclusion is to be reached. The skills and
expertise of a business valuator play a critical role in determining a
value conclusion.
Three commonly accepted approaches to value are asset, income, and market.
The choice of which approach to adopt depends on the specific facts and
circumstances of each valuation. Each approach utilizes various
valuation methodologies. The approaches and methods include:
Income Approach |
Market Approach |
Asset Approach
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Factors to Consider
The market approach involves using publicly traded company data
or private company transaction data to derive appropriate pricing
multiples. The pricing multiples are then applied to the subject
company factors to arrive at a value conclusion. The choice of the
appropriate pricing multiple to use depends on various quantitative and
qualitative factors that must be fully researched and analyzed by the
business valuator. Public company data is more readily available while
the private company databases are growing.
Public Company
Guideline Method - Publicly traded companies often provide a reasonable
basis for comparison to the relative investment characteristics of the
subject company being valued. Companies in the same or similar line of
business as the subject company are selected for comparability. If no
companies in the same or similar line of business have securities traded
on public markets, companies having roughly similar financial profiles
and facing substantially similar risks are considered. Ideal guideline
companies are in the same industry as the company being valued. If
there is insufficient transaction evidence available in the same
industry, it may be necessary to consider companies with an underlying
similarity of relevant investment characteristics, such as markets,
products, growth, cyclical variability, and other salient factors.
The basic criteria for
selecting a guideline company include (1) it must be publicly traded,
(2) it must be financially solvent, and (3) it must have a threshold
trading price to support that it is not traded at a speculative price.
Once a comparable group of guideline companies are selected various
pricing multiples are calculated and applied to the subject company. It
is important to note that qualitative and well as quantitative factors
must be carefully studied before applying public company multiples to
the subject company. A valuator should never just apply a public
company multiple to a subject company until a careful analysis of
various factors is completed.
Barnes Wendling Valuation Services uses Fetch XL to gather and analyze public company data.
Private Company
Transaction Method - The private company transaction method involves
calculating multiples from the acquisition and sales of privately held
firms and applying those multiplies to the subject company's factors.
The application of this method is best suited when valuing a very small
business. This method is very complex due to the limited information
available in the various databases that report private company
transactions and is often misused by inexperienced valuation
professionals.
Barnes Wendling Valuation Services
subscribes to various databases that report private company
transactions. Our team possesses the skills and knowledge to
appropriately employ the private company transaction method . |
