Business Valuation / Business Enterprise Appraisals

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Business valuations are performed using methodology similar to the process for real estate appraisals. However in business valuation, the data sources are different. Further, there are nuances in the form of analysis.

Reasons for business valuation engagements include the following:

estate tax valuation and planning
business purchase price allocation;
divorce;
loan documentation;
litigation;
research to determine the asking price for a business;
documentation that a purchase price is equitable.

Options for business valuation include :

Multiple of revenue -- the revenue multiplier varies from industry to industry and with the size of the business. The appraiser compiles data for similar types of businesses with similar levels of sales and determines the business valuation based upon industry rules of thumb, features for the subject property and comparable sales and data for the sales .

Comparable sales -- the appraiser seeks information for similar businesses which sold recently including revenues, net profits, assets, liabilities.

Cash flow/income approach/earnings based methods -- options include a discounted cash flow analysis and multiplier of net income (typically net income before interest, taxes, depreciation and amortization, sometimes referred to as EBITDA).

Asset based valuation -- this business valuation method is a hybrid of the net value of assets plus a multiplier of annual cash flow. The multiplier is typically relatively low since it is added to asset value.

Methods for business valuation vary with the type of business. Mid-market to large businesses are more likely to sell based upon a multiplier of EBITDA. Smaller businesses are more likely to sell based upon a multiplier of revenue or an asset based valuation methodology.

The success and outlook for the business also affects the business valuation method and multiplier. A business with poor recent financial results and uncertain future prospects is more likely to sell based upon assets than on a multiple of revenue or EBITDA. A successful mid-market business with steadily growing revenues and net profits would be more likely to sell for a multiple of EBITDA.

The appraisal division of O'Connor & Associates is a national provider of commercial real estate appraisal services including cost segregation studies, due diligence, business valuation, insurance valuations, feasibility studies, financial modeling, gift tax valuations, highest and best use analyses, real estate consulting, casualty loss valuations and HUD map market studies.

Patrick C. O'Connor has been president of O'Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction. For more information please www.poconnor.com today!

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