Establishing the true value of any business is a complex process where financial performance is considered in context with many other, more subjective factors. Identifying and quantifying these factors can have a significant impact on buyer appeal, greatly affecting the final sale price.
Determining a fair market value is not a precise science, and can vary depending on the type of business and the reason for a request of a valuation appraisal. There are a wide range of factors to consider – from the book value of the assets, to a host of intangible elements. In general, the value of the business will rely on an analysis of the company’s cash flow, its past and current earnings, and the sustainability of those earnings. In other words, its ability to generate consistent profits will ultimately determine its worth in the ‘marketplace’.
We have a focus on acquisition, divestment and facilitation of the sale of private companies, which has resulted in sale prices of between $1 million and $20 million. We have facilitated the sale of well over 300 businesses with sale prices in excess of $1 million.
Our comprehensive database and the statistical evidence derived there-from, together with our involvement with various industry statistical databases, indicates the value of those businesses with sound profitable history by using an ‘industry’ multiplier – the PE (Price to Earnings) Ratio. This multiplier fluctuates and is market sector driven.
However, whilst earnings history is key to most business valuations, the PE Ratio may not necessarily be the best indicator of value. Strong, but under-performing assets and revenue strengths, where price to sales will have an influence on the methodology used, can be equally important.
An industry specific formula has been devised byLINK, based on the ‘real world’ in the market. Most business valuation methodologies should recognise market evidence and industry specific practice.
- Identify Risks, Barriers to Entry
- Market Evidence
- Multiple Methodologies
- LINK’s own valuation tool
- Add-backs and account normalisation
- Multiple weighting factors