Market Value Analysis |
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| This
is the most objective and accurate method of buying or selling a business. It has several
steps and involves some sophisticated business mathematics. Banks and good business
brokers use this or a combination of these methods. |
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| Balance Sheet Technique |
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Book Value = |
Assets minus Liabilities |
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= |
$673,520 - $240,735 |
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= |
$432,785
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| Adjusted Balance Sheet Technique |
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Adjusted Net Worth = |
Adjusted Assets minus Liabilities |
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= |
$945,078 - $240,735 |
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= |
$704,343
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| Earnings Approach |
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Variation 1 - Excess Earnings Method |
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Step
1 |
Adjusted tangible net worth = |
$945,078 - $240,735 |
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= |
$704,343
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Step
2 |
Opportunity Costs = |
$301,086
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Step
3 |
Estimated net earnings = |
$366,070
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Step
4 |
Extra earning power = |
$64,984
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Step
5 |
Value of intangibles = |
$324,922
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Step
6 |
Value of
business tangible net worth + value of intangibles = |
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= |
$1,029,265
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Variation 2 - Capitalized Earnings Approach |
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net earnings |
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Value
= |
-------------------------------------------------------------------- |
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rate
of return |
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$366,070
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Value
= |
--------------------------------------------------------------------- |
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0.25
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Value
= |
$1,464,281
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Variation 3 - Discounted Future Earnings Approach |
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Step
1 |
Projected
future earnings approach |
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|
Year |
Pessimistic |
Most
Likely |
Optimistic |
Weighted
Average |
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1998 |
$353,908
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$364,854
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$383,097
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$366,070
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1999 |
$389,381
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$401,424
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$421,495
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$402,762
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2000 |
$424,855
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$437,994
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$459,894
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$439,454
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2001 |
$460,328
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$474,565
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$498,293
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$476,146
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Step
2 |
Discount
future earnings at the appropriate present value factor |
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Year |
Forecasted Earnings |
X |
Present Value Factor |
= Net Present Value |
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1998 |
$366,070
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X |
0.8000
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$292,856
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1999 |
$402,762
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X |
0.6400
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$257,768
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2000 |
$439,454
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X |
0.5120
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$225,001
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2001 |
$476,146
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X |
0.4096
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$195,030
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Total |
$970,654
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Step
3 |
Estimate
income stream beyond 4 years |
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1 |
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Income
Stream = Fourth year income X |
-------------- |
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Rate
of Return |
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= |
$476,146
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X |
4.00
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= |
$1,904,586
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Step
4 |
Discount
income stream beyond four years (using fifth year present value factor) |
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PV of income stream = |
$1,904,586
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X |
0.3277
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= |
$624,133
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Step
5 |
Compute
the Total Value |
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Total
Value = |
Step
2 + Step 4 |
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Total
Value = |
$970,654
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+ |
$624,133
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Total
Value = |
$1,594,787
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| Market Approach |
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Value
= |
estimated
earnings x Representative price-earnings ratio |
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= |
$366,070
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Times |
4.7
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= |
$1,720,530
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| Summary of Approaches |
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Base
Price |
Base
Price + Intangibles |
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Balance
Sheet Technique |
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$432,785
|
$564,785
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Adjusted
Balance Sheet Technique |
$704,343
|
$836,343
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Earnings
Approach |
Variation 1 |
$1,029,265
|
$1,161,265
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Variation 2 |
$1,464,281
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$1,596,281
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Variation 3 |
$1,594,787
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$1,726,787
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Market
Approach |
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$1,720,530
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$1,852,530
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Average |
$1,157,665
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$1,289,665
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Median |
$1,246,773
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$1,378,773
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© Copyright,
2007, Jaxworks, All Rights Reserved. |
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