Business Valuation

On a regular basis, business owners, investors and experienced bankers look for a simple way to determine business value: a rule of thumb or formula. Hoping to avoid the expense and trouble of hiring a professional valuator, a value formula common to the business type is used; thereby assuming determination of a company’s value can’t be complicated.

While using a rule of thumb may be a considered alternative in developing a rough test price, it provides a weak form of market comparison for business value; relying solely on this approach poses inherent problems. However, the rule of thumb approach typically employs a multiple of cash flow (or EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization) and/or a multiple of revenues.

Business valuation is the act or process of determining value of a business enterprise or ownership interest therein. Valuation of a security interest in a closely held business is a difficult process due to the lack of an active free trading market. Because of the absence of such a market, an underling notion in valuing closely held businesses is found in the investment value principle. The principle suggests the purchase of an equity interest in a closely held business should be viewed like any other investment. In essence, the “investor” not only expects to receive the initial investment back, but also receive a fair return on the investment commensurate to the risk incurred.

At Verity Accountancy, PC, Brian Tanz holds valuation credentials under: