In business brokering and mergers and acquisitions (M&A), several valuation methods are used to determine the worth of a business. Each method has its own approach and is suited for different scenarios. There are three standards of value to consider when valuing a business:
Fair Value – Fair value has multiple meanings, depending on the valuation's purpose. Fair value usually produces a more conservative value than fair market value or investment value.
Fair Market Value – “The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.” – IRS as defined by Revenue Ruling 59-60.
Investment Value – The value or price a particular investor is willing to pay based on individual investment requirements and expectations. Investment value usually produces a higher value than fair market value or fair value.
Market Approach
This approach estimates value based on comparable businesses that have been sold or are publicly traded:
Comparable Company Analysis (comps)Formula: Multiple x Metric = Value
Explanation: Identify publicly traded companies or recent sales of similar businesses, and apply valuation multiples (e.g., Price to Earnings, Enterprise Value/ EBITDA) to the subject company's financial metrics.
Precedent Transactions: Formula: is similar to comps, but uses valuation multiples derived from past transactions involving comparable businesses.
Explanation: Analyze past M & A transactions involving similar businesses and apply relevant multiples to the subject business.
Pricing multiples are derived from transactions that include acquisitions and sales of entire companies, divisions, or large blocks of shares. We search several subscription-based, comparable company analysis databases.