Confusion and misunderstanding seem to surround business valuation more than virtually any other business topic. Everyone seems to have a different multiplier or rule-of-thumb to value every size and type of business. You've worked your whole life for the opportunity to either buy or sell a business. Why risk it on a "crap; shoot"? The need to accurately price a business is paramount to successful acquisitions, divestitures, succession planning, financial planning, insurance planning and exit strategies to name a few.

 

Licensed business appraisers are required to consider all of the 15 to 20 (some say more) conventional valuation methodologies for each valuation. Since each of these methods is considered to be relatively inaccurate when used individually, the appraiser is to select the most appropriate methods that he/she thinks will most accurately represent the size, type and market of the subject business. Ultimately, seven to ten methodologies are used. The resulting value of each method is weighted and the weighted average (or a range of values) is one of the primary factors that determines the final opinion of value.

 

It is my opinion that it makes no sense to give any weight to these individual valuation methods, which are considered inaccurate. The weighted results of a group of inaccurate values don't magically become more accurate. I compare this to the computer analogy, "trash-in, trash-out". Since each methodology and the weighting itself is suspect, the appraiser is required to perform due diligence in the form of what is called a "test of reasonableness". The appraiser considers the expected debt service and the potential return on investment while asking the question, "Does it make sense"?

 

Why spend the time and money up-front for the first inaccurate weighted results? Performing a test of reasonableness on the front end makes more sense and is possible with The TASCON^® Business Analyst. It is referred to as the "Optimization Method"; this method uses only non subjective, third party data and is based on the fact that a business is worth that price at which it will pay the market structured debt service that a sale creates, pay a market salary to the owner and pay a market return on investment. In any market, at any snap shot in time, there is only one mathematical value as which a business can simultaneously meet these three criteria. The Optimization Method, used by The TASCON^® Business Analyst at www.TheBusinessAnalyst.com, determines that price.