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Methods Used for Business
Valuation
Here are several methods for determining the value of a business.
Executive Business Brokers uses a multiple of the
seller's discretionary cash (SDC) to determine a
business' worth in the marketplace.
Multiple of Discretionary Cash
(SDC)
This Method uses a multiple of seller's discretionary
cash flow. Retail businesses generally range from
0-2 times the SDC. Manufacturing, distributing and
service businesses range from 0-4 times SDC. Plus
the depreciated value of the fixtures & equipment,
wholesale value of the salable inventory and market
value of the real estate if included.
Tangible Assets (Balance Sheet Method)
Sometimes used to evaluate a business that is losing money. Value is
based on current assets.
Cost to Create Approach
Used when purchasing an existing business. Value is based on
estimating the start up costs minus what is missing plus a premium
for the time saved.
Rule of Thumb Method
Uses averages to provide a frame of reference for a business’ worth
in a particular industry.
Book Value
The least controversial method. Value is based on the business’
assets and liabilities.
Multipliers
Uses an industry average sales figure from recent sales of
comparable business. The value of a business is determined by
multiplying the sales by the gross sales.
Excess Earning Method
Estimated from an industry average and is similar to the capitalized
earnings approach. Here the return on assets is separated from other
earnings ("excess" earnings) generated.
Capitalized Earning Approach
Based on the rate of return in earnings that the
investor expects.
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