Method #2: Asset Based Approach

To determine the value of a business using the asset approach, the company’s assets should represent most, if not the entire value. This calculation takes all net tangible assets: the machinery, equipment, furniture, fixtures etc. and determines the fair market value replacement cost. The asset based approach to business valuation is used by the seller if the business has minimal profitability, or if the owner is no longer concerned with the continuation of the company. An industry or strategic buyer might also use this approach if they are looking for a company to buy cheaply to acquire certain assets.

Method #3: Income Based Approach

This final approach is the most common method for valuing small and medium-sized businesses. As indicated by the name, the income approach is based on company earnings and revenue.

One method is known as the Multiple of Discretionary Earnings Method, which is defined as the net operating income + necessary adjustments + the owner’s salary. The Multiple is the inverse of the capitalization rate, which is determined by a company analysis. Another income approach, the Discounted Cash Flow method, is based on a reasonable five to ten-year projection, and uses a discount rate to calculate the present value of the future cash flows. Different types of buyers and their advisors will have different approaches to business valuation, but most will include some variation of the Income Approach. For example, buyers who are focused on future profits will likely look at the discounted cash flow approach when it comes to the valuation of the company, whereas a buyer who is looking for growth by acquisition might look at the Multiple of Discretionary Earnings method of valuation instead.

This is where we at OConnor Business Brokers can help. Our certified business brokers have many years of experience with all types of business valuation, and we work with you to find the best fit. Want to learn more? Contact us today, we can’t wait to connect with you!