Business Appraisal

The objective of a business appraisal is to establish what another entity or person would be prepared to pay for that business. It is critical to have one before taking your business to market. There are three approaches to appraisal  and various methods for each approach.

  1. Assets based 
  2. Income based
  3. Market based

Asset based approaches

Asset based methods include;

  • Balance sheet or Book Value
  • Net Assets
  • Adjusted Net Assets - This involves determining the market value of the company's assets.
  • Liquidation Value
  • Cost to Replace

Income based approaches

These generally involve uncovering the actual financial performance of the business only, net of owner included costs and expenditures, and using the current earnings or a weighted average of several years earnings to establish the earnings for Valuation purposes (CE)  or adjusting for costs or revenues that will influence future performance to establish the future maintainable earnings (FME) of the business.

The CE or FME can then be applied to various methods to establish the Enterprise or Business Value (EV). The three principle methods are

  • Multiple of Earnings
  • Capitalised Earnings
  • Discounted Cash Flow

These methods involve making an assessment of the risk around the CE or FME and applying it to the method to arrive at a ‘current market value (CMV) or market value range(CMVR)' for the business.

Other methods can be used depending on the particular characteristics of the business such as:

  • Excess Earnings
  • Cash Flow

Market based approaches

Market based approaches are used where there are sufficient transactions occurring within a market sector that enable direct comparison. i.e coffee shops, bars and restaurants. A common market multiplier is arrived to apply to earnings to establish the CMV. The danger of using market results is that comparisons can be made of businesses that are, in reality, not similar.

For larger businesses or companies where the shares are being traded the the value of the shares can established by calculating 

  • Price to Earnings
  • Price to Cash Flow
  • Price to Book Value