Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

June 12, 2017

Enough Approaches to Valuing A Business

By Jeremy Albelda

valuation

“One of the most discussed aspects of selling a business is undoubtedly the business valuation and the preparations needed to make the transaction actually happen, “says Achim Neumann, President, A Neumann & associates, LLC, a New Jersey based M&A advisor and business brokerage firm, “however, the metrics for arriving at a Fair Market Business Value are fairly straightforward.”

Essentially, there are three generally accepted approaches commonly used to creating a worthwhile business valuation, which are:

  • Income approach,
  • Market approach, and
  • Asset-based approach.

“Within each category, a variety of methodologies exist,“ says Scott McMahon, Partner, MR Valuation Consulting, LLC, New Jersey, “ in order to assist in the estimation of fair market business value.”  The following sections contain a quick overview of the theoretical basis of each approach.

Income Approach

The income approach business valuation is based on the premise that the value of a business is the present value of the future earning capacity that is available for distribution.  The most often used income approach to the valuation of businesses is a discounted cash flow analysis which involves forecasting the respective cash flow stream over an appropriate period and then discounting it back to a present value at the prevailing discount rate for the market segment.  Another common approach is the capitalization method – dividing the economic income by an estimated discount rate, less growth.  The discount rate should always consider the time value of money, inflation, and the risk inherent in ownership of the business or business interest being valued.

Market Approach

The objective of the market approach business valuation method is to identify comparable transactions and price multiples where the target company’s business and financial risks are similar to those of comparable companies.  Key criteria for such comparisons are typically purchase prices, EBITDA, and Revenue multiples.  This method uses sales of similar companies to derive a value.

Asset-based Approach

A third approach to the business valuation is the asset-based business valuation approach based upon the concept of replacement as an indicator of value.  The asset-based approach establishes value based on the cost of reproducing or replacing the property.  The asset-based approach is generally used to estimate the value of companies that do not generate income directly – with an asset base that is mainly comprised of tangible assets.  For example, the asset-based approach is used for real estate holding companies and investment holding companies.

Once all three business valuation approaches have been weighed against each other, the derived value obviously needs to make sense from an investor’s point of view.  For that matter, business valuation firms in New York to Los Angeles should provide a Price Justification Chart, outlining to a potential investor the Return-On-Investment for a particular company.

A good business valuation firm will present the most educated number based on research, analysing the numbers correctly after performing the three aforementioned business valuation methods, as well as lending localized/industry related knowledge.

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Andrey O, Investor

“Finally enjoying retirement after recently selling my business using the services of A Neumann & Associates. Joe Oddo provided the conduit to a successful transaction. Joe knew when to inject input and when to simply listen and allow the buyers to vent, step back and regroup. The outcome met our expectations and got us to the finish line, which included my staying with the company six months in order for the buyers to get their footing and keep our workforce in the loop. He helped at every step by providing his expert guidance & resources. Thank you!”

Emily Parker Myers, Co-Owner - Myers McRae

“I had been in touch with Karin and Gary from A Neumann & Associates regarding some opportunities and was looking forward to meeting with them. Hence, when they organized a seminar in Princeton, NJ, I was quick to sign up. The seminar was very informative as the team walked the attendees through various scenarios and referenced real life buying/selling situations they had been through. The sessions by Gary, Karin and Achim were crisp and focused and brought clarity to potential seller and buyers. I strongly recommend the team and look forward to continue working with them.”

Gaurav Tyagi

“Thank you for your Event on "How to value, Sell, and Buy A Business for Maximum Profit" and the insight into ANA’s approach on what is involved in the Business Exit for sellers. Garys Hervieiou's "Business Valuation", Achim's "Deal structure" presentation and Karin’s "Preparing the Package" are real street knowledge shared. They answered attendees questions which makes it more interesting for learning from others. Great for small businesses like us. The presentations were totally worth our time and travel for the event to Princeton, NJ from Rockville MD. Ravi Bhutani, President, CIPS”

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Pat Iammatteo, Owner

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Eric H., Investor

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

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Dennis Frazier

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