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Business Valuation
The appropriate value of a business in an arms length sale or acquisition (i.e. with an independent third party) is in essence the value at which the business could be sold in the open market. Text books and academia would point to this concept as a transaction between a willing buyer and willing seller.
Arriving at a market value for a business is never straight forward. The business could be valued using different valuation methods and each method may only be suited to certain business. There is no one formula that suits them all. As they say valuation is an art and not a science as there are several factors unique to every business which may impact on the market price the business would be expected to fetch.
As a general rule, using market multiples would provide a broad valuation for the business which would generally be on the high end as market multiples are usually available for corporate or listed businesses which have diverse activities with premiums built into the price. However, for a business of a specialist nature, the income method using the discounted cash flow (DCF) may be well suited as the cash flows are unique to the business and are considered to capture the value contained in a business.
A point bear in mind is that market value is used when the business is sold in the ‘open’ market and to an independent third party on an arms length basis but if the sale and purchase is take place between a specific buyer and a specific seller (common example would be selling to family members or to other directors) a fair value approach would be required.
There are plenty of valuation specialists firms who apart from doing the valuation, can help identify unique feature to a business or advise on the best way forward to value your business.
The appropriate value of a business in an arms length sale or acquisition (i.e. with an independent third party) is in essence the value at which the business could be sold in the open market. Text books and academia would point to this concept as a transaction between a willing buyer and willing seller.
Arriving at a market value for a business is never straight forward. The business could be valued using different valuation methods and each method may only be suited to certain business. There is no one formula that suits them all. As they say valuation is an art and not a science as there are several factors unique to every business which may impact on the market price the business would be expected to fetch.
As a general rule, using market multiples would provide a broad valuation for the business which would generally be on the high end as market multiples are usually available for corporate or listed businesses which have diverse activities with premiums built into the price. However, for a business of a specialist nature, the income method using the discounted cash flow (DCF) may be well suited as the cash flows are unique to the business and are considered to capture the value contained in a business.
A point bear in mind is that market value is used when the business is sold in the ‘open’ market and to an independent third party on an arms length basis but if the sale and purchase is take place between a specific buyer and a specific seller (common example would be selling to family members or to other directors) a fair value approach would be required.
There are plenty of valuation specialists firms who apart from doing the valuation, can help identify unique feature to a business or advise on the best way forward to value your business.