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Business Valuation

Advisor

Ryan Brown Melbourne, FL

Hi - Is there anyone here that could help me with the valuation of a business?

Thanks,
Ryan Brown

21 January 2021 5 replies General

Answers

Advisor

Ryan Brown Melbourne, FL

Thank you all so much for the feedback. I really appreciate it.

Advisor

Jennifer Polhemus Santa Monica, CA

If you are seeking to value a business for possible purchase, then yes, I can help.

Advisor

James Watters Norman, OK

Mr. Brown -
Business Value: Capitalization of Earnings

A generally accepted method of determining the value of a business is to “adjust” the company’s future earnings. Typically, adjustments are based upon how risky the business is and how quickly the buyer wants to recover his or her investment. The prospective buyer selects a “capitalization” rate (%) that adjusts the company’s future annual earnings.

Future earnings are not worth as much as present earnings and must be “discounted” to their present value. For example, after the buyer investigates the prospective company’s financial, marketing and competitive conditions, a capitalization rate of 20% is set expecting the payout in 5 years. And based upon the expected risk of the future earnings, buyer and seller agree upon a discount rate of 8%.

The projected earnings stream over the next 5 years is ...

Future Discount. Present. Earnings /
Earnings. Rate @ 8%. Value. Cap Rate
Yr 1. $25,000. .925926. $23,148. $115,741
Yr 2. $25,000. .857339. $21,433. $107,167
Yr 3. $30,000. .793832. $23,815. $119,075
Yr 4. $40,000. .735050. $29,401. $147,005
Yr 5. $50,000. .680583. $34,029. $170,146
Sum. $131,827. $131,827 avg.

Discount tables are available online.

For example in Year 2, earnings @ $25,000 times (x) the discount factor of .857339 = present value of $21,433. Capitalization rate @ 20% divided into $21,433 = $107,167.

The value of the business equals the sum of the present values of future earnings or the average of the annual capitalization rates.

Hope this was helpful.

Advisor

Seth Lynch Plano, TX

Couple simple, generally acceptable options. Of course the valuation method depends on what the ultimate goal is of that valuation.

1) if it has been given any external equity money, value the last amount of money against the % ownership that was given in exchange. Use that as a share price and use that to calculate equity value. Subtract any debt owed and that’s a simple evaluation.

2) a time honored, simple option is take the earnings before interest, taxes, and depreciation and multiply by 5. Subtract any debt from that and there’s the value.

3) if no earnings, a lot of people use 1x annual sales

Whether buying or selling, these are ways to get to an initial ‘fair’ valuation point to start negotiations.

Advisor

Seth Lynch Plano, TX

Couple simple, generally acceptable options. Of course the valuation method depends on what the ultimate goal is of that valuation.

1) if it has been given any external equity money, value the last amount of money against the % ownership that was given in exchange. Use that as a share price and use that to calculate equity value. Subtract any debt owed and that’s a simple evaluation.

2) a time honored, simple option is take the earnings before interest, taxes, and depreciation and multiply by 5. Subtract any debt from that and there’s the value.

3) if no earnings, a lot of people use 1x annual sales

Whether buying or selling, these are ways to get to an initial ‘fair’ valuation point to start negotiations.

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