Market Approach



The to Valuation Of course, you want an expert business appraiser that will convince the judge or jury of his opinion of value. The to business valuation and appraisal can be the mortar in the cement to make a concrete case. Most people are familiar with real estate appraisers using a comparable market analysis in appraising residential and commercial property. We like thein business valuation jury trials where the jurors may not be familiar with the complex approaches to business appraisal. uses the in many ways that produce very credible reports. We are one 18 worldwide contributors to the annual publication BizCompsã, an annual compilation of privately held business sales. We are also members of the acclaimed Pratt’s Stats “Hall of Fame” for privately held sold business data. In addition, your expert is in the trenches every day selling businesses that he or she has previously appraised. Why is this important? If we use the income approach to arrive at the business value, we can measure our conclusions with the actual database of sold businesses as a sanity check. There are few other appraisers in divorce business appraisal cases that have this ability. We will also use sold data to show empirical statistics relative to multiples of valuation pricing to both gross and net income. Many CPA’s who do business valuation will arrive with capitalization rates similar to real estate (8-12%) Empirical data by industry will show these rates to be flawed for small to medium sized businesses.

Commonly used by real estate professionals, this approach determines the value of a business by using an “industry average” multiplier. This industry average is based on the price at which comparable businesses have sold for. As a result, an industry-specific formula is devised, usually based on a multiple of gross sales. These formulas, often called Rules of Thumb, can be troublesome because they may not focus on the bottom line; profits, earnings, EBIT or . If an industry Rule of Thumb says company XYZ is selling for 50% of its annual gross sales, would you pay 50% for those sales if the company was not profitable? In most cases, no, business people want to invest in something that is profitable, sustainable and stable enough to produce growth in the future. The is key to opening the door to opportunities which allow you to make the best business choices.

The appraiser therefore tries to focus on industry formulae where they are applied to a multiple of earnings. This approach is similar to analyzing a publicly traded company by its P/E (price to earnings) ratio.The approach, if enough empirical data is available, can very often be the most reliable valuation methodology for many industries. , because of its status as an appraisal and brokerage/intermediary firm, has an extensive data base of actual sales to draw upon. In addition, by means of membership, we also have access to many of the world’s largest data bases of done deals.

    Here are a few industry multiplier examples:

  • Retail (Family) 1/3 of annual sales
  • Service Companies (General) 1.7 X annual net profit + inventory + equipment
  • Manufacturing (Job Shop) 3-5 times plus WIP – with patent, 4-6 times

To find the right multiplier for your industry, try contacting your trade association or contact at 888-210-2221 OR