Multiple of Earnings Business Valuation - Why You Should Use Historical Earnings

When you value a business based on a multiple of earnings, you have a difficult decision to make. Should you be conservative and use past proven earnings? Or, is it better to make projections about future earning and use that number in your calculation? Business buyers are paying for the opportunity to benefit from your company's future profits, so basing your valuation of projected future earnings can make sense.

Of course, the future is impossible to predict perfectly so buyers are hesitant to pay based on unproved future earnings.

If your profits have been trending up for the past 3-5 years, projecting that same rate of growth into the future and then applying a multiple to that projected profit may seem like a valid way to go. Here's the problem: In the multiple of earnings method there two variables: the earnings figure you use plus the number by which you multiply the earnings.

Impressive growth the past few years will definitely allow you to justify a higher than average multiple. So your recent growth should be reflected in your asking price through a higher multiple. If you use an earnings figure based on projected future growth and then also apply an above average multiple to those projected profits because of an above average growth rate you have given yourself credit twice for the same positive feature.

Expect a lot of resistance from the buyer.

Also, the best negotiating strategy is to be aggressive when setting your multiple and be more conservative with determining your profits. (And by "conservative" I simply mean using historical, proven profits instead of projected future profits). The buyer can't argue with you over the facts, but they can and will when it comes to future projections.

Also, it pays to be more aggressive when setting your multiple than your earnings. Increasing your multiple just slightly can have a dramatic effect on the overall selling price. If you can justify to the buyer a multiple of 4 instead of 3 it will mean a 33% increase in your selling price. That's a lot easier than proving that profits will increase in the future by 33%.

So when using the multiple of earnings method, use proven past earnings because the buyer can't argue with those facts. Then use the highest multiple you can justify. This will give you the best chance of maximizing your selling price. And the entire negotiation process will go smoother because you and the buyer won't have to argue over guessing how much the business will earn in the future.

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Patrick Jennings is the founder of several web sites related to the buying and selling of small businesses including http://www.TheBizSeller.com - a for-sale-by-owner site that helps you sell your business as fast as possible and without using a broker. His How To Sell Your Business videos are locate at: [http://www.youtube.com/thebizseller]http://www.youtube.com/thebizseller.

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Business Valuation Services and the Economy

By Shane Hester

Business valuation services are heavily relied upon when it comes to legal proceedings, insurance settlements, contract issues, and many other everyday situations faced in the world of business. The thing is, with the economy in a bit of a bind this year, and looking to remain troubled or perhaps even worse for the foreseeable future, business valuations will be more and more likely to show the symptoms of difficult economic times.

Business Valuation Services Will Likely Reflect Lower Values

In our current economic conditions and with the recession we're facing worldwide this year, it's clear that there will be a trickledown effect to nearly all business values. Think about it - as the mortgage crisis and other factors on Wall Street continue to wreak havoc on the stock market, the results gradually sweep throughout entire industries. Consumers are having a more difficult time purchasing goods and services from businesses; therefore, the businesses are also having a much more difficult time producing a healthy bottom line profit. For what it's worth, it's important to realize that business valuation services will most likely reflect lower values on average than they would have a year ago, for instance.

401k And Pension Funds Are Obviously Shrinking

Because business valuation services are often used to take measure of certain assets held under a business umbrella, such as 401k accounts and pension funds, it's also wise to expect valuations and appraisals to reflect the drastic downturn in the stock market when it comes to the securities a business holds. Depending on which indices are taken into account, the stock market has fallen into as much as a 20% plunge over the last couple of months. Business valuations are naturally going to reflect the bear market conditions.

What's The Solution?

Well, most economists predict that we are in for a bit of a struggle over the next year or two - there's just not much hope for a really rapid economic recovery anytime soon. This means that there is a really valid question when it comes to using business valuation services to reflect a maximum possible value in their results - is it best to perform the valuations now, low as they might be, or to wait just a little while longer and hope for increased values? There is no definitive answer. It's a question many are struggling with in today's economic environment.

The bottom line is that it is important to realize that business valuation services do reflect current financial and economic times in the analysis and data they provide - even if those results are less than desirable.

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Business Value Vs Selling Price

Author: David Mattocks

When the owner of a business asks: "What is my business worth?", do they mean what is the value of my business, or... what will my business sell for? In most cases, the seller is asking what price will my business most probably sell for on the open market.

Value and price are different. There is often a big difference between the value of a business and what it will actually sell for. Business Brokers and Business Transfer Agents are constantly approached to explain the difference between value and price, when preparing a business for sale.

In essence, a business valuation determines a value that can be irrefutably defended by a suitably experienced and qualified business valuer, or appraiser. A formal business valuation is usually called for when litigation, an Inland Revenue problem, or some other serious issue requires a specific and qualified value for the business to be established.

A price is the figure an experienced and accredited Business Broker formulates - employing several accepted methodologies - which, in their opinion, a willing buyer will most probably pay for the business.

Business valuers/appraisers find themselves in a difficult position. They can only value a business based on facts, figures, fundamentals, research and other realistic assumptions that are able to be resolutely defended. A formal business valuation - even when based on facts, figures and fundamentals - can be significantly higher than what a prospective purchaser is willing to pay for the business.

So what is it that creates this difference between the value of a business and the price? The easy answer is perceived value. In other words... what is the business really worth to the buyer? This figure is the value of the business as perceived by the buyer and subsequently, the price they will pay... the selling price.

There are several other factors affecting the selling price of a business. For instance, an all-cash transaction will generally result in a lower selling price than one that is part financed by the seller; and the longer the term of the loan, the higher the final selling price will be (once the loan is finally paid off).
Another example would be a case where, in exchange for a higher price, a seller who owns the land and building (in addition to the business) may not charge rent for the first 10 years so that the buyer has more working capital for expansion; or no debt service for the first 5 years of a 10-year note for leasehold improvements, and so on.

Favourable deal terms increase price, not value.

The lesson here is simple. Business appraisers can only value a business based on what can be defended. Use the valuation as a beginning (or ending) point of the selling process. Know the details of what you are using as a reference to develop your value expectations and understand that perceived value and actual value can be very different.

David Mattocks is the owner of Sunbelt Business Brokers in Southampton, Hampshire. He is the author of "How To Prepare Your Business For Sale" and the FREE 12-part email training course for owners of UK businesses, "Preparing To Sell Your Business". http://www.sunbeltsellsbusinesses.co.uk

Article Source: [http://EzineArticles.com/?Business-Value-Vs-Selling-Price&id=3649034] Business Value Vs Selling Price

The Essence of a Credible Business Valuation

Author: Nasreen Haque

A business valuation for any enterprise may be necessary in specific conditions, and a business owner may seek an appraisal for tax purposes, possible liquidation, documenting conformity to industry norms for standards certification, or when facing a lawsuit. In the event that a business evaluation is called for, it is vital that you are aware of the appraisal’s possible legal and monetary impact, so as to make the right choice of business appraiser. Reviewing a potential appraiser’s competence and reliability becomes the first step to acquiring a credible business valuation report.

Evaluating an enterprise’s fiscal worth is based on a number of general and industry-specific factors, and the assessment depends on the processes employed. In other words, the valuation specialist should not only bring a strong proficiency to handle financial information with specific experience in business valuations, but must also possess a good understanding of the industry.

Before hiring a valuation expert, it is important to have a private discussion with the potential appraiser to communicate details about the legal and ownership issues in the business and the actual need for a valuation. This will help the assessor to study goals and possible conclusions of the valuation so as to adapt the process to the specific enterprise. Figuring out key fiscal valuations of the enterprise and seeking detailed explanations of the possible ‘premise of value’ or the estimated ‘standard of value’ will help judge the competence level demonstrated by a potential valuation professional.

Evidently a business valuation is a careful study that is based on real-time data rather than personal beliefs, and the assessment must cohesively link data from the company with relevant industry-specific information as also global trends in the financial market. A valuation requires a careful appraisal of company operations, as gathered from site visits and via appropriate dialogue with the administration, and the data collection procedure must employ established methodologies that are suitable to the industry.

Any business valuation must be shaped into a well-thought out analysis of the overall company operations and management competence, and must provide unbiased opinions and a lucid conclusion. Aside from exploring key financial components, a comprehensive report analyzes capital gains and assets, profitability, debt, and reasonable risk, as well as provides comparative findings with respect to industry norms. The actual research methodologies and key appraisal techniques must be clearly identified in the report, and the usage of external data and assumptions made must also be documented.

Regardless of the actual methodology employed during a business valuation, the key to a credible report lies in a comparative study of findings weighted against the industry’s standard figures. The final valuation must have a logical flow based on the analysis that the appraiser undertakes, and the report must clearly elucidate the underlying principles used to arrive at the final fiscal value of the enterprise.

Undeniably a business valuation is a complicated process and its credibility is decided by the valuation protocols employed, which must be appropriate to the enterprise as well as the industry as a whole. As long as the evaluation is well planned and strategic, it is sure to translate into a comprehensive report with a clear, cohesive and unbiased financial evaluation.

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