How to Value a Business or Asset?

When it comes to performing a valuation for a business or another asset their are many ways to approach process. There is no right way to value a business, however there are some guidelines that provide a good starting point to determine the value of a company/asset.  This would be similar for other asset classes and you can use the same approach.

Normalized Earnings

A  valuation for a company in it's simplest form should be based on it's normalized earnings or normalized EBITDA ( earnings before interest taxes depreciation/ amortization.) Once you determine the normalized earnings, valuations usually like to take the average of multiple year's or come up with the "steady state" for the normalized earnings, this is just a way to further determine the starting point.

You can take this one further step and present value the expected future normalized earnings as well which is usually performed.

Multiple for the Business 

Applying a multiple for the business to determine the baseline valuation is the next step.  Coming up with a multiple for the business is very subjective.  The earnings multiplier sounds simple but it is not, this is the number to apply the normalized earnings which determine the starting point for the valuation for the business.  These multiples can range from 1-10 times depending on the business, industry, and the investors' required rate of return.

Determining the multiple consists of analyzing the following factors:

-Obtaining comparable assets and obtaining market values for these assets.

-Using historic multiples for similar size companies in the same industry.

- Factoring in risk premiums

Fair Value 

At the end of the day, no matter what the valuation is determined for the company or asset, the fair value is always going to be the purchase price that the buyer is willing to pay, and the selling price that seller is willing to accept.  All business transactions are completed on good faith, and negotiating a fair value for the business or asset in question is part of the process to complete the deal.

For more information, please contact an MP Group Advisor, we would be happy to further discuss.  Give us a call at 416-214-0527.

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