It is essential to understand the value of your Fort Lauderdale business in order to plan effectively. Consider using a Fort Lauderdale Business Broker. There are three different methods to determine the value of a business in Fort Lauderdale:
The Asset Approach
The going concern value is the value of the assets with the company functioning, less the liabilities so that it equals net equity.
The liquidation value is the amount realized if the Fort Lauderdale business were terminated and the assets were sold.
The Market Approach
A company’s value is calculated using the market value method by analyzing completed transactions of comparable Fort Lauderdale companies and applying their EBITDA and revenue multiples to the subject company. Relevant companies must be in the same industry, have a similar size, and have been in existence for a relatively short period of time. As a general rule, multiples based on EBITDA are more relevant than multiples based on revenue.
Comparability based on public companies – this method compares earnings and revenue of publicly-traded companies in the same industry, adjusting for marketability and size.
The Income Approach
The excess earnings method capitalizes earnings after taking into account the return on investment. The choice of a capitalization rate must be carefully considered, and the market value method must be incorporated. It is generally the excess earnings method that is closest to the valuation of a business in Fort Lauderdale to a financial buyer.
Using discounted cash flows (DCF) as a method of valuing a Fort Lauderdale business determines its present value by discounting future projected cash flows. To estimate the “cost of capital” for a business, an appraisal professional must determine the interest rate on debt, the rate of return on equity, and the debt to equity ratio. For instance, let’s assume the business is borrowing from a bank at a rate of 5%, investors require 25% return on equity, and the percentage of debt to equity is 50%. The cost of capital would be the net after tax cost of debt ( 35% tax rate) or 3.25% plus required return on equity of 25% in this example = 28.25%, divided by two ( 50/50 debt to equity) or $14.13%.
The following factors must also be taken into account when applying each of these methods:
Identify the company’s performance in terms of revenue and EBITDA, management depth, and recurring revenue streams.
Industry – competitive positioning, distribution of customers, industry trends, depth of acquirers.
Capital Markets – overall economic outlook, cost and availability of leverage, equity in the market.
Other important factors include a) the degree of reliance on the owner, that is how many of the company’s clients are dependent on him or her personally, b) the depth of the management team, and c) does the business have clearly defined growth plans? In terms of acquisition targets, new geographic markets or customer segments, which will be followed by a clearly defined road map, and d) what percentage of the business is recurring revenue and what percentage is project-based revenue. Multipliers are higher for businesses based on recurring revenue.
It is important to remember that business valuation is not an exact science, and the method that works for one business might not work for another. There are many factors that influence the valuation of your business, including the size of your business, its growth rate, your industry, stability, and profitability.
In most cases, the business owner will want to know what the “goodwill” value of the company is. As a result of the goodwill value, the business has more value than its assets.
