There are three generally accepted approaches to prepare a valuation of a business -- the asset approach, the income approach, and the market approach. In the market approach, we estimate the value of a business based on what comparable businesses have sold for. We use the market approach to prepare our free business valuation for business owners that are considering selling their business. To prepare this report, we use the Direct Market Data Method ("DMDM"), a recognized method to estimate the selling price of a business. This particular market approach method was developed by the Institute of Business Appraisers. Information about using the DMDM market approach is on their website, www.go-iba.org.
When buyers look at how much they can earn from a small businesses, they are interested in the total income available to them. In general, the reported earnings of small businesses are purposely kept low. This is because these earnings are reported for tax purposes and owners want to keep their taxes low. Therefore, we use Seller's Discretionary Earnings ("SDE") as a better measure of the earnings of a small business than the reported income. It is defined as net income before deducting the primary owner's compensation and benefits, other discretionary, non-operating, or non-recurring income or expense, depreciation, interest, and taxes. We need to recast the earnings in order to calculate SDE and show a potential buyer what the owner actually earns from the business.
In the market approach, we use financial information and data on what businesses like the one we are appraising sold for to prepare an estimate of what the subject business is likely to sell for. We subscribe to a database of actual business sales. We analyze the sales price of businesses comparable to the one for which we are preparing a valuation. We use the average of selling prices as multiples of revenues and Seller's Discretionary Earnings ("SDE") and apply these multiples to the financial data of the company we are valuing.
If you are interested in a business appraisal, just fill out our Business Valuation Contact Form on the left side of this page.
We also offer a third-party valuation prepared by an accredited appraiser at a low price.