Business Valuation

HOW DO WE VALUE YOUR BUSINESS?

At the Bridgestone Group, our team has the credentials and experience to determine the true value of your business.  We don’t simply say we are “experts”, we back it up with nationally recognized credentials in Business Valuations and Accounting.  

Three Generally Accepted Methods to Value a Company

The most common methods used to appropriately value a business are the Market Approach, Income Approach, and Asset Approach.  At the Bridgestone Group, we calculate value using a combination of methods to ensure our initial valuation is most appropriate.  

Then, what sets the Bridgestone Group apart is we understand these methods produce an “average” valuation for your business, simply based on a review of your financial statements.  But your business is more than just a financial statement.  This is why we emphasize the need to “Know Your Business” !  By knowing the strengths of your business operations, and if you aren’t simply an average company within your industry, we are then positioned to support the rationale for adding premiums to the initial valuation. 

Such premiums are driven by many factors such as: a stable, diverse & loyal customer base; well trained, motivated and vested employees; solid contracts with customers or vendors; potential growth in existing markets; untapped markets; condition of your fixed assets; high quality accounting & record keeping system; and more.  So, if your business is above the average within your industry, we believe the price should reflect that.    

Simply stated, the Market Approach is much like a real estate transaction, where comps are used as an indication of value. Though it is relatively easy to compare your house to another house that has recently sold in your neighborhood (after adjustments are made for "known" differences such as square feet, etc.), it is unfortunately a lot more challenging to find "true" comps for a business. A few reasons are:

  1. No two businesses are the same, and Brokers have access only to the financial statements of a comp. And as we said before, your business, and that of others, are more than a financial statement. Thus, this approach alone will produce a valuation that equates to the "average" value of recently sold businesses; and
  2. A recent sale of a "comparable" business, that matches your size, earnings, industry, and location do not occur often and thus Brokers tend to stretch the idea as to what is a good comp.

All this often provides for a limited pool of "true" comps and thus we often do not rely exclusively on this approach. But, when reasonable comps are available, a common equation used for the Market Approach is:

[Seller Discretionary Earnings x Industry Multiple of comparable businesses = Valuation]

SDE is the "total value" you, as the owner, receive from the business, ie: net income, plus owner salary, depreciation, fringe benefits/perks, etc.

Industry Multiple is calculated by looking at all recent sales of like-kind businesses (comps) and determining a ratio, e.g., Sales price to Net Earnings.

Certain buyers / investors believe your business is worth the present value of its future income stream. This approach recognizes the relationship between the estimated future income stream and the expected rate of return on investment, which results in the present value of the business (the amount a buyer is willing to invest).

There are several complicated methods, including the Capitalization of Earnings method and Discounted Earnings method when relying on the Income Approach. These methods rely on various projections such as: future growth rate of your business; development of a reasonable capitalization rate, terminal / residual value into perpetuity; and assumptions of various risk factors.

It is also important any income or expense items generated from "non-operating" assets, e.g., rental of vacant land or investment income from excess cash, as well as "non-operating" liabilities, be removed from the estimated future income stream prior to applying the Income Approach. Then, the net fair market value of the non-operating assets and liabilities is added back to the initial value derived from either the Capitalization or Discounted methods.

The Asset Approach uses the fair market value of the business assets (sometimes referred to as replacement value). This amount is then reduced by the fair market value of all recorded and unrecorded liabilities. The negative aspect to this method is that it does not address the operating earnings of the business, if such earnings exist.

This approach is a sound method for estimating the value of a non-operating business (e.g., holding or investment companies). It is also a good method for estimating the value of a business that consistently generates losses or which will soon be liquidated. This approach sets the "floor" for determining the value of the business.