Finding the right method

There are numerous ways to value a business, depending on the reason the assessment is being done. The three main approaches — asset, income and market — each have variations that can yield different results.

“An asset approach is determining what is the value of the assets and liabilities that you have, what is the fair market value of the assets and liabilities that you have,” says Don Zwilling, director of Barnes Wendling Inc.’s Valuation Group. “Another method might be, what would it cost to reconstruct the assets that you have?

“Under the income approach, there is the capitalized earnings method and the discounted cash flow method. These are basically looking at a stabilized level of earnings or cash flow and applying a multiple to that and saying, ‘What would someone be willing to invest to get that sort of average earnings with cash flow?’”

Within the market approach there are two possible tracks.

“The guideline company method is looking at public companies that are actively traded on the exchanges and looking at their multiples and performance rations and applying those ratios and multiples to the subject business at hand,” Zwilling says. “The private company transaction method, there are several databases of available information that tell us what different companies in different industries have sold for. These databases keep actual transaction of small to medium-sized business.”