For many business owners their most valuable asset is their business. Knowing what a business is worth is essential when facing a major event such as buying or selling it; doing financial or estate planning; or getting a divorce. But during our practice we have learned entrepreneurs typically have little or no idea what their businesses are worth.

They THINK they do (based on a rule-of-thumb or some other arbitrary guide), but the reality is they dramatically UNDERESTIMATE or OVERESTIMATE the true value of the business.

How do we value a business?

For most situations there are up to three different ways to value a business; our job is to decide which approach or combination of approaches is most appropriate to value your business.

Market Approach

This approach involves comparing the entity being valued to counterparts engaged in the same or similar lines of business whose shares are publicly traded. For reliable results, the comparables must be similar to the entity being valued in:

1. Size
2. Methods of operation
3. Markets and customers served
4. Accounting methods applied
5. Projected growth in sales and earnings

To apply the market approach, comparable company values measures are based on stock prices. This value is then divided by two earnings parameters (i.e. sales and net income) and a balance sheet parameter (i.e. book value). The resulting multiples are then applied to the subject company to estimate its value.

The market approach is based on the third-party nature of verifiable or "arms length" transactions. Successful usage of this approach requires that the analyst have access to a universe of arms-length transactions involving companies similar to the subject company. Information on sales of comparable companies/businesses can be difficult to obtain for parties not privy to the transactions.

When such data is publicly available, the market approach is the most credible and understandable approach of the three. However, this approach still may ignore or incorrectly include the potential combination benefits or synergies associated with a transaction. If a business is unusual, there may be few or no companies with which it can be compared, so the Market Approach does not work.

Neither does the Market Approach work for valuing professional practices, or for companies whose future results are likely to differ from its past performance, or for companies whose assets consist of intellectual property or patents.

Income Approach

The income approach estimates the Company's value based on its ability to generate income. This estimate may be calculated by projecting cash flows into the future and discounting them back to present at a stipulated rate of return or capitalizing a free cash flow base at an appropriate rate of return. The free cash flows used in this valuation methodology are defined as cash available to debt and equity holders after investment.

Of the two sub-approaches, the discounted cash flow methodology is ideal when valuing companies whose future performance is projected to be materially different from its past performance. It requires explicit identification of the future cash flow streams that anticipated business plans will generate.

For this reason, the discounted cash flow methodology approach is also useful when valuing companies that:

• operate in niches which are uninhabited by comparable companies
• face unique circumstances or operating environments.

Asset Approach

The third approach is called the Asset Approach (sometimes referred to as the Replacement Cost Approach). This approach is applicable, when there is a need to value tangible assets such as an office building, drilling equipment, trucks and so forth.

Different businesses require different valuation approaches. Our job is to pick the approach or combination of approaches, appropriate to value the business in question.

To find out a realistic value of your business:

1. register with us and create a listing for evaluation purpose only

2. download and fill out evaluation form and send to us

Best regards,
The bizmatch.ca Team