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Businesses are normally valued by using either the Asset Value or Going Concern methodology
A/ Asset Valuation- Sale of Assets
The Asset value is essentially the Breakup Value of all the assets in the company, at current market value and reduced by outstanding debts and expected liquidation costs. The resulting value from this calculation provides the asset value or value of the business on a “breakup” basis.
B/ Going Concern Valuation- Sale of Shares
Most owners would like to sell their company as a “Going Concern”, which recognizes the earning ability, goodwill & the value of established processes and staff within the company.
This valuation is usually more complicated as it requires:
- “normalizing” earnings (adjustments for owner draws in excess of normal wages, or other personal benefits),
- eliminating the impact of assets or revenue streams that do not form part of the main revenue stream of the business (such as rental income).
Adjusted EBITDA (profit/earnings before interest, depreciation and amortization) is than weighted to adjust for any unusual scenarios to obtain the weighted average of EBITDA.
This EBITDA factor is then multiplied by the “multiple” which reflects the capitalization rates expected by the market, adjusting for risk factors.
*** this is a very simplified valuation which does not consider working capital needs, industry type or future potential.
It is an indicative valuation for a mature business.
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