We prepare business valuations most commonly for marital or shareholder breakups, and for purchase and sale of a business.
This method is generally used to determine the value for an operating company. The terminology “multiple of earnings” used by analysts refers to a number which is multiplied by the earnings of the company to determine its value. The multiple is determined by market conditions and the strengths and risks of the industry and the specific company.
The balance sheet of the company is restated to reflect the value of the properties held. This approach is appropriate where the income stream does not give a true indication of the underlying value of the company. No goodwill results from applying this methodology. A common application of an asset based approach is the valuation of a real estate holding company.
Goodwill is a residual number and is calculated as the excess of the value (price) of a business less the value of its assets and liabilities. Goodwill arises due to the benefits which accrue to a purchaser from buying an established company rather than starting one from the ground. Examples of things that result in goodwill are: a solid customer base; a significant market share; a preferential location; an established infrastructure; and other factors which contribute to the profitability of the business. Goodwill can be personal or commercial. Personal goodwill exists because of a specific person and is not transferable to an outside party, and as such it has very little value. Commercial goodwill accrues to the business itself, it is not affected by the owner or manager of the business, and as such it has value and can be sold.