Valuing a business in your industry

We are often asked: what business valuation methods are best for a specific industry? Since the standard valuation methods can be used to value any business, a better question is what choices work best to value a particular company, regardless of the industry it’s in.

If you have seen a professionally prepared business appraisal report, you should have spotted that a number of valuation methods were used to determine the business value. That’s because no one method provides an all-conclusive answer. A combination of methods in your analysis helps to consider what the company is worth from a number of perspectives.

The income based methods focus on the company’s ability to generate returns for its owners given an acceptable level of risk. The asset approach helps you view the business as a set of valuable assets, whereas the market methods compare the company to other similar firms.

Each valuation method may provide a useful insight into business value. In some cases, certain methods tend to be more compelling than others.

Consider a start-up company with a unique set of technologies that set it apart from competition. Clearly, comparing it to other firms is not useful since the company is very different. In this case the market comparisons are not useful. You should instead focus on analyzing the company’s own ability to generate earnings and its unique asset base.

The situation may be very different when valuing established companies in well developed industry sectors. A restaurant can easily be compared to other businesses similar to itself. So market based valuation methods are very useful here as they help you determine the restaurant value in comparison to other similar businesses.

Cash cow businesses that generate predictable earnings time and again are great candidates for valuation with direct capitalization methods such as the multiple of discretionary earnings. On the other hand, fast growing firms are best valued using the discounted cash flow method.

When in doubt, remember that using a number of valuation methods is the best way to determine company value. Each method offers you a unique view of business worth. Having the results from a number of methods is a solid way to draw a defensible business value conclusion.

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