There are several generally acceptable valuation techniques which, by and large, can all be categorized as one of, or as some combination and/or variation of three general methods.

• Asset Cost Base method, which is based on replacement cost, or fair market value of included assets.
• Income or Earnings Based method, which looks at the present value of future earnings.
• Market Comparison method, which estimates the value of one business by comparative value of others.

Balance Sheet Value (asset cost base related) is simply the net value of the asset components minus the liability components included in the valuation or sale; working capital vs. investment capital; assets at book value in a share sale, usually, or at fair market value in an asset sale, usually, and with liabilities at actual.  In either case, balance sheet value is historic, and reflects what the company ‘has earned and has retained’ from business-past.

The larger issue between buyer and seller is generally not balance sheet value however, but goodwill value. Balance sheet value is today and thus a known quantity, reflecting what the company ‘has earned and has retained’ from business-past.  Goodwill value is futuristic; based on the value of an unknown future. Goodwill valuation is to estimate ‘what from past success’ can be realistically sustained by the business into the future, under new ownership perhaps. Goodwill value is based on what the company ‘will earn and will retain’ from business-future.

Goodwill Value (income and earnings related) is typically based on a multiple of normalized ebitda; earnings before interest, taxes, depreciation, amortization. To isolate ebitda, ValuPro is designed to recalculate and reorganize the company’s income statements into recast income statements that restate net profits as earnings before interest, taxes, depreciation, amortization and before the total of all forms of owner compensation (such as wages, salaries, dividends, benefits, perks) and other accruals to the owner that are in excess of that deemed reasonable market replacement wages.  Recasting may include the normalization of rents, vehicles, entertainment, charitable donations and other expenses, to business-norms as well.

Discretionary Cash Flow from such earnings provides a “reasonable time, reasonable return” regulator. Valuation/Sale Price is regulated by the ability of sustainable revenues to first satisfy all costs, expenses, taxes and service any debt there may be, and for discretionary cash thereafter to repay the purchase/sale price over a reasonable period of time, with a reasonable return on investment, and with a reasonable “rainy-day” surplus.

Valuation Method accounts only for part of the story, however.  Reasonable and real value to one may not be so to another. Purpose, motivations and compulsions of seller and buyer alike, and the type and degree of strategic fit or non-strategic fit for a buyer will be factors that may bring unique and legitimate weighting and suasion.

Every Valuation that includes a goodwill component contains an arbitrary component. Goodwill implies that “something established in the past will gainfully continue into the future,” and goodwill valuation goes on to predict/estimate just what the continuing gain will be. Since no one knows the future, it’s obviously arbitrary and the best anyone can provide is a reasoned estimate. But, that being the best available, a ‘reasoned estimate’ is the objective. 

If selling the business is the ultimate objective, value/price will ultimately require the mutual agreement of buyer and seller. In particular, the buyer must become satisfied that the on-going business will be sufficient to satisfy the business’s operating costs and expenses, service its debt, pay its taxes, meet all other anticipated costs and obligations, pay for itself (recover the purchase price) over a reasonable period of time with a reasonable return on investment, and retain a reasonable rainy-day fund. In particular as well, the seller must become equally satisfied that the agreed price will be fully paid in due course.