Approaches and Methods

In general, there are three approaches to valuing a business.  Together these approaches have eight methods for valuing a business.

A combination of any number of these eight methods is used to estimate value. The Most Probable Selling Price (MPSP) is then calculated by weighing each of the methods used.

Valuation Tools 

There are many valuation tools to assist in valuing a business.   These tools are used to calculate the MPSP.

Adjustments to MPSP

Once the MPSP is calculated, adjustments are made based on value factors to determine the adjusted MPSP.  There are fifty-four value factors that can affect the value of a business.  

Tests 

The adjusted MPSP is then tested using two tests.  The first test is to ensure the business will qualify for a loan as per the Small Business Administration loan guidelines.  The second test is to ensure a buyer of the business can pay themself fair compensation for their time, adequately cover any debt they incur to purchase the business, and earn a strong return on investment based on the risk incurred when acquiring the business.

Pricing

Pricing is dependent upon the supply and demand of the business type, amount and type of financing available, and in some cases interest from strategic or synergistic buyers.

Conclusion

In conclusion, estimating the value of a business and determining the price of a business is not simply accepting a business owner’s desired price or using hearsay.  A thorough valuation and pricing analysis is required.  Doing so will greatly increase the chance of a business selling in a timely manner and at a fair price.

To learn how much your business is worth, contact Eric for a confidential, complimentary consultation.

Eric Gall
MBA, CM&AP, CBI, ABI, M&AMI
239.738.6227
[email protected]