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Market Value Analysis

 
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.
 
Balance Sheet Technique
 

Book Value =

Assets minus Liabilities

   
   

=

$673,520 -  $240,735

   
   

=

$432,785

     
             
Adjusted Balance Sheet Technique
 

Adjusted Net Worth =

Adjusted Assets minus Liabilities

 
   

=

$945,078 -  $240,735

   
   

=

$704,343

     
             
Earnings Approach
  Variation 1 - Excess Earnings Method
 

Step 1

Adjusted tangible net worth =

$945,078 -  $240,735

 
     

=

$704,343

   
 

Step 2

Opportunity Costs =

$301,086

   
 

Step 3

Estimated net earnings =

$366,070

   
 

Step 4

Extra earning power =

$64,984

   
 

Step 5

Value of intangibles =

$324,922

   
 

Step 6

Value of business tangible net worth + value of intangibles =  
     

=

$1,029,265

   
             
  Variation 2 - Capitalized Earnings Approach
     

net earnings

 
   

Value =

--------------------------------------------------------------------  
       

rate of return

   
             
       

$366,070

   
   

Value =

---------------------------------------------------------------------  
       

0.25

   
             
   

Value =

$1,464,281

     
             
  Variation 3 - Discounted Future Earnings Approach
 

Step 1

Projected future earnings approach      
             
   

Year

Pessimistic

Most Likely

Optimistic

Weighted Average

   

1998

$353,908

$364,854

$383,097

$366,070

   

1999

$389,381

$401,424

$421,495

$402,762

   

2000

$424,855

$437,994

$459,894

$439,454

   

2001

$460,328

$474,565

$498,293

$476,146

             
 

Step 2

Discount future earnings at the appropriate present value factor  
             
   

Year

Forecasted Earnings

X

Present Value Factor = Net Present Value
   

1998

$366,070

X

0.8000

$292,856

   

1999

$402,762

X

0.6400

$257,768

   

2000

$439,454

X

0.5120

$225,001

   

2001

$476,146

X

0.4096

$195,030

         

Total

$970,654

             
 

Step 3

Estimate income stream beyond 4 years    
             
       

1

   
    Income Stream = Fourth year income X

--------------

   
       

Rate of Return

   
             
             
   

=

$476,146

X

4.00

 
   

=

$1,904,586

     
             
 

Step 4

Discount income stream beyond four years (using fifth year present value factor)
   

PV of income stream =

$1,904,586

X

0.3277

     

=

$624,133

   
             
 

Step 5

Compute the Total Value      
   

Total Value =

Step 2 + Step 4

     
   

Total Value =

$970,654

+

$624,133

 
   

Total Value =

$1,594,787

     
             
Market Approach
             
 

Value =

estimated earnings x Representative price-earnings ratio  
 

=

$366,070

Times

4.7

   
 

=

$1,720,530

       
             
Summary of Approaches
 

Base Price

Base Price + Intangibles

 
  Balance Sheet Technique  

$432,785

$564,785

 
  Adjusted Balance Sheet Technique

$704,343

$836,343

 
  Earnings Approach Variation 1

$1,029,265

$1,161,265

 
      Variation 2

$1,464,281

$1,596,281

 
      Variation 3

$1,594,787

$1,726,787

 
  Market Approach  

$1,720,530

$1,852,530

 
      Average

$1,157,665

$1,289,665

 
      Median

$1,246,773

$1,378,773

 
             

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