Methods of Valuing a Business
For Purchase or Sale
Raymond S. Kulzick, DBA, CPA
1. Asset-oriented
1a. Book value
1b. Assets at market value
- value assets (and liabilities) at current value
- include value of goodwill & other intangibles
2. Earnings-oriented
2a. Capitalize earnings
2a1. One-year earnings base
- adjust earnings, apply multiplier
2a2. Multi-year (5) earnings base
- adjust each year, average, apply multiplier
2b. Capitalize individual assets plus excess earnings (irs method)
- compute average adjusted 5-year earnings
- subtract normal earnings on net assets (5 year)
- apply multipliers to each asset & excess earnings2c. Multiplier of cash earnings
- cash taken by owners (over normal salary)
- plus depreciation and increase in cash
- less capital investments
- apply multiplier2d. Discounted future cash flows (present value)
- need to project 5-year cash flow
- discount based on risk & size2e. Multiplier of stabilized earnings
- project reasonable current year income statement
- adjust earnings
- apply multiplier
3. Market value
3a. Sale of competitors
- compare to recent sales of competitors
3b. Rules of thumb
- gross sales: sales times industry multiplier
- gallons sold: for gas stations
- rent multiplier: commercial property
Sources:
Hyden, S. D. & Mard, M. J. (1995). Advanced business valuation. Florida Institute of Certified Public Accountants.
Ledereich, L. & Siegel, J. G. (1990, February). What's a business worth? Valuation methods for accountants. The National Public Accountant, pp. 18-22.
© Copyright 1999 Raymond S. Kulzick. All rights reserved. 991220.
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