Business Value

Quick Takeaways

Understanding the basics of business valuation is a must for any business owner or investor.
Covid-19 has had an impact on the business valuation process.
Different types of businesses require different approaches to valuation.

Understanding the basics of business valuation is a must for any business owner or investor. While some situations require a formal assessment from a professional certified in valuation, knowing how to calculate a quick estimate can help with business planning, filing taxes, or applying for a loan. There are different valuation methods based on assets, earnings, or market value.

Covid-19 has had an impact on the business valuation process. Consider whether the business may have been affected by government mandates or laws. It’s also important to understand the company’s response and performance in the context of the pandemic.

Different types of businesses require different approaches to valuation. In many cases, the information needed to conduct a valuation and even the calculation method may be specific to an industry or property type. Hotels and motels, retail establishments, franchises, and special purpose properties such as farms or cannabis businesses all have their own unique needs.

See References for more information.

References

NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.

Terminology

BUSINESS ENTERPRISE VALUE (BEV)
"A term applied to the concept of value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled work force, working capital, trade names, franchises, patents, trademarks, contracts, leases, and operating agreements." (The Dictionary of Real Estate Appraisal, 4th ed., Appraisal Institute)

GOING-CONCERN VALUE
"An operating business enterprise that is expected to continue." (The Dictionary of Real Estate Appraisal, 4th ed., Appraisal Institute)

GOODWILL
"An intangible, salable asset arising from the reputation of a business; the expectation of continued public patronage; including other intangible assets like trade name and going concern value...," (The Language of Real Estate, 5th ed., John W. Reilly)

Valuing the Intangible

What Is an Intangible Asset? (Investopedia, Jun. 3, 2024)

It is often difficult to determine an intangible asset's future benefits and lifespan or the costs associated with maintaining it. The useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are considered long-term assets with a useful life of more than one year.

The Impact of Intangibles—Unlock Unseen Value (Deloitte, Feb. 19, 2024)
Regular reviews of intangibles portfolios are necessary to keep strategies up to date and aligned with business objectives. Know-how is the number one intangible asset that drives competitive advantage, and data is consistently undervalued as a driver of revenue and value.
Companies may want to invest in upskilling and auditing the value created by their investment in intangibles to define where pockets of value lie and disseminate knowledge about the scope and importance of intangibles throughout the organization.

A Guide to Tangible and Intangible Assets (Yieldstreet, Feb. 15, 2024)

Before investing in a company, an investor may choose to evaluate both tangible and intangible assets to get a complete picture of a company’s value and potential. Tangible assets, like buildings and machinery, provide stability and can serve as collateral. This contribute to the company’s immediate financial health.
In contrast, intangible assets, such as patents and trademarks, drive future growth and innovation, even though they are harder to quantify and are more volatile.

The Three Valuation Approaches (Quantive, Sep. 10, 2023)

“The three widely used valuation methods used in business valuation include the Asset Approach, the Market Approach, and the Income Approach.

The three approaches vary in the way they conclude to value, but the goal of each approach is still the same: to assess the value of the operating entity (i.e., the business).”

Hotels & Motels

Everything You Must Know to Get Your Hotel Valued (Arrowfish, Aug. 9, 2024)

Location: Hotels situated in prime areas, such as city centers, tourist attractions, business districts, and transportation hubs, tend to have higher values due to increased demand and higher occupancy rates. For example, a hotel near the V&A Waterfront in Cape Town will have a higher valuation compared to a property outside this key area. The proximity to amenities and attractions significantly boosts the hotel’s market appeal and financial performance.

Seven Essential Steps to Valuing a Company: Insights from the Hospitality Industry (Kiplinger, May 31, 2024)

There are several methods to value a company, including the discounted cash flow (DCF) method, comparable company analysis and asset-based valuations. The choice depends on the nature of the business and the purpose of the valuation.

How Much is My Property Worth? Determining Fair Market Value (Hotel Management, Feb. 16, 2024)

Due to the fluctuating nature of the hotel business, the most common way brokers will evaluate your property is based on current performance, while considering past results and future potential. Employing a room revenue multiple and a capitalization rate based on your net operating income are the most straightforward mechanisms for determining how much your property is worth based on actual property performance.

Retail Establishments

Beyond the Dark Store: Exploring Valuation Challenges and Methods for Big-Box Retail (Invoke Tax Partners, Jul. 2, 2024)

The dark store theory argues that operational big-box stores should be valued as if they were empty, basing property tax assessments on the characteristics of vacant and possibly obsolete properties. This approach has led to significantly lower tax assessments for operational stores, impacting municipal budgets and redistributing tax burdens. The theory’s application often involves the sales comparison approach, where the chosen comparable properties are vacant, potentially skewing the market value assessments of fully operational stores.

How To Value a Retail Business (Top Hat Business Brokers, Feb. 8, 2024)

With a market-based valuation, your company’s earning potential in relation to market demand will determine its value approximation. The purpose of this valuation method is to deem a business’s fair market value using the going rate of competing companies and similar enterprises in the same market.
When using a market-based retail business valuation method, you must specify the goods and services your company offers. The method also includes an assessment of the business’s goodwill or the difference between what someone would pay to buy the business and its amount of net assets.

How to Value a Retail Store (ProjectionHub, Nov. 8, 2023)

Income-Based Valuation
Rationale: Focuses on the earnings power of a retail business, considering its revenue generation and profitability.
Usage: Discounted Cash Flow (DCF): Involves forecasting the retail business's future cash flows and discounting them back to their present value at a rate that reflects the risk involved.
Capitalization of Earnings: This method calculates the expected normal earnings of the retail business and divides them by a capitalization rate that assesses risk and return on investment.

How to Sell and Value a Retail Business (Raincatcher, May 2023)

Learn about factors that make a retail business valuable, formulas for calculating value, tips for reducing risk, and how to prepare for selling the business.

Small Firms and Franchises

3 Ways to Value Any Small Business (The Ascent, May 10, 2024)

Asset-based valuation doesn’t expressly incorporate a company’s profitability or its opportunity for growth. Still, it can be expressed through intangible assets, things of value you can’t see or touch. Certain intangibles might not even be on the business’s balance sheet before valuation.

How to Accurately Determine the Value of Your Small Business (Lake County Advisors, Jan. 8, 2024)

The market value approach is one of the most common approaches used by buyers, which involves comparing your business to similar recently sold businesses. This method relies on available market data to establish a comparative value.
It works well for businesses operating in sectors with numerous comparable sales. For example, a retail store chain can be evaluated based on recent sales of similar retail companies, offering a market-relevant valuation based on actual transaction data. A very common market approach is to evaluate market comps, comparing what their Adjusted EBITDA was vs. what the sale price was. This creates market multiples, which can then be applied to your own business to determine valuation.

Conducting A Franchise Appraisal & Determining Business Value (Garner, Ginsburg & Johnsen, May 8, 2023)

In a formal franchise appraisal, the appraiser will combine the three valuations to come to a final figure. The valuation of your franchise business may be affected by other factors, as well. One factor is the purpose of the franchise appraisal. For example, if you are trying to determine the value in order to avoid estate taxes, you will want a low value. On the other hand, if you are looking to sell, you will want a higher value. We have seen instances in which franchisees looking to sell their business have been haunted by a low valuation made as part of an estate-planning process.

Franchise Business Valuation Multiples (Raincatcher, Aug. 2023)

“Valuation multiples play a pivotal role in gauging the worth of a franchise business. They provide valuable insights into your company’s financial standing and operational efficiency by benchmarking it against similar enterprises in the franchise market.”

Valuation Issues

The Role of Risk in Business Valuation (BizWorth, Oct. 30, 2023)

Operational Risks

Operational risks encompass challenges associated with a company's day-to-day activities. These risks can include supply chain disruptions, labor issues, production delays, or quality control problems.
Evaluating operational risks helps in assessing the company's ability to maintain consistent revenue and profitability.

If Your Divorce Case Includes a Business, Expect a Valuation (The Marks Law Firm, Sep. 8, 2023)

Business valuators usually take one or a combination of the following approaches when they value a business: (1) income-based approach; (2) asset-based approach; or (3) market-based approach.
Instead of going into detail about each of these approaches, here are the basics that you want to know. Every approach takes some or all of the following into consideration: (1) a business’ profitability (starting with a review of the business’ profit and loss statement); (2) the goodwill of a business; and (3) a business’ tangible and intangible assets.

Business valuations can be manipulated by unethical individuals or organizations. For example, a business owner may inflate the value of their business to attract investors or to sell it at a higher price. Alternatively, an investor may undervalue a business to acquire it at a lower price. Valuations can also be manipulated through accounting practices or by misrepresenting the financial information of a business.

How Economic Factors Impact Business Valuations (Marcum, Feb. 20, 2023)

For companies with flat or minimally increasing revenues, these higher costs directly reduce the earnings available to business owners. On the most basic level, a reduction in earnings equates to a reduction in the value of a company.

eBooks & Other Resources

eBooks.realtor.org

The following eBooks and digital audiobooks are available to NAR members:

Business Valuation: An Integrated Theory (eBook)

Business Valuation and Taxes: Procedure, Law and Perspective (eBook)

Business Valuation for Dummies (eBook)

The Market Approach to Valuing Businesses (eBook)

Real Estate Market Valuation and Analysis (eBook)

The Small Business Valuation Book: Easy-to-use Techniques That Will Help You... Determine a Fair Price, Negotiate Terms, Minimize Taxes (eBook)

Books, Videos, Research Reports & More

As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.

The Valuation of Office Properties: A Contemporary Perspective (Appraisal Institute, 2009) HD1393.58.U6 S55

Business Valuation Bluebook: How Successful Entrepreneurs Price, Buy, Sell and Trade Businesses (Facts on Demand Press, 2005).HD 1387 Si4

Business Valuation Discounts and Premiums (John Wiley & Sons, Inc., 2001) HD 1387 P88bv

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