Methods Used for Business Valuation

Here are several methods for determining the value of a business. Executive Business Brokers uses a multiple of the seller's discretionary cash (SDC) to determine a business' worth in the marketplace.

Multiple of Discretionary Cash (SDC)

This Method uses a multiple of seller's discretionary cash flow. Retail businesses generally range from 0-2 times the SDC. Manufacturing, distributing and service businesses range from 0-4 times SDC. Plus the depreciated value of the fixtures & equipment, wholesale value of the salable inventory and market value of the real estate if included.

Tangible Assets (Balance Sheet Method)

Sometimes used to evaluate a business that is losing money. Value is based on current assets.

Cost to Create Approach

Used when purchasing an existing business. Value is based on estimating the start up costs minus what is missing plus a premium for the time saved.

Rule of Thumb Method

Uses averages to provide a frame of reference for a business’ worth in a particular industry.

Book Value

The least controversial method. Value is based on the business’ assets and liabilities.

Multipliers

Uses an industry average sales figure from recent sales of comparable business. The value of a business is determined by multiplying the sales by the gross sales.

Excess Earning Method

Estimated from an industry average and is similar to the capitalized earnings approach. Here the return on assets is separated from other earnings ("excess" earnings) generated.

Capitalized Earning Approach

Based on the rate of return in earnings that the investor expects.