Market Approach
Commonly used by real estate professionals, this approach determines the value of a business by using an "industry average" multiplier. This industry average is based on the price at which comparable businesses have sold for. As a result, an industry-specific formula is devised, usually based on a multiple of gross sales. These formulae, often called Rules of Thumb can be troublesome, because they may not focus on bottom line profits, earnings, EBIT or EBITDA. If an industry Rule of Thumb says that companies sell for 50% of annual gross sales, would you pay 50% of sales if the company was not profitable? Probably not. The appraiser therefore tries to focus on industry formulae where they are applied to a multiple of earnings. This approach is similar to analysing a publicly traded company by its P/E (price to earnings) ratio.The approach, if enough empirical data is available, can very often be the most reliable valuation methodology for many industries. George & Company, because of their status as appraisers and brokers/intermediaries, has an extensive data base of actual sales to draw upon. In addition, by means of membership, we also have access to many of the world's largest data bases of done deals. Here are a few industry multiplier examples:
To find the right multiplier for your industry, try contacting your trade association or contact George & Company at 508-753-1400 info@georgeandco.com.
|
