The value of a business depends upon several factors, such as the number of years in business, number of employees, the amount and condition of equipment, the facilities, supplies and inventory, and the stability of earnings.  The value of a business is usually a function of its earnings, not its tangible assets. There are three primary ways of valuating a business.



3 Approaches to Valuing a Business: 


1. The Asset Based Approach derives an indication of value based on the cost to replace the tangible assets. If the earnings do not have a value greater than the assets, then the value of a business becomes the value of its tangible assets. Depending upon the nature of the tangible assets, a buyer might be willing to pay more for a business with a lot of assets based on the idea that if all goes badly, the buyer can at least sell off the assets and recover some of the investment.

2. The Market Approach derives indications of value using ratios or factors resulting from the earnings, sales and/or assets of past transactions of similar businesses. These ratios are then applied to the company’s sales, earnings and/or assets to derive an indication of value. 

3. The Income Approach derives indications of value by converting earnings into a value using a capitalization rate, discount rate, or multiple factor. This method requires the level of earnings and a conversion factor to convert the earnings into a value. Properly matching the selected level of earnings (pretax, after-tax, discretionary or some form of cash flow) with the correct conversion factor (cap rate, discount rate or multiplier) is the key to obtaining a reasonable and supportable indication of value.

If done correctly, each of the above methods should produce similar values. As you can see, properly determining value is a complex process. When obtaining a business valuation report, make sure it is completed by an accredited valuation expert who is a member of a professional society working in compliance with established professional standards.

Mr. Al Golden specializes in providing comprehensive business valuation, forensic accounting, litigation support, expert witness, income & estate taxation, complete CFO & controller services. He is a Certified Public Accountant (CPA), Certified Valuation Analyst (CVA), a Diplomat of the American Board of Forensic Accounting (DABFA), Certified in Financial Forensics (CFF), and is a member of the American Institute of Certified Public Accountants, the National Association of Certified Valuation Analysts, and the American College of Forensic Examiners. A.M. Golden serving its clients’ needs is located in Carlsbad California in San Diego County.

A.M. Golden Accountancy Corporation offers a free initial consultation - To speak with Mr. Golden, please call (760) 444-1913.  If you’d prefer, you may also send an email to al@amgolden.com