When buying or selling a business here in New York, valuation can be tricky. No seller wants to receive less than the business is worth, and no buyer wants to pay too much. A Buyer or Seller always wants some valuation analysis undertaken. Here is a quick guide to a few standard business valuation methods.

Generally, there are three or four commonly recognized valuation methods for selling or purchasing a New York business. These are:

• Income valuations
• EBITDA and SDE valuations (often considered forms of income valuations)
• Asset valuations
• Market valuations

Some methods are better suited for use with certain types of businesses. Typically, business buyers and sellers run a rough calculation for each method and do a complete analysis for one.

Income Valuation

The income valuation method uses earnings — income — as the basis for determining value. Typically, this method analyzes the discounted cash flow or the capitalization/return on investment. The first estimate future cash flow revenues and reduces those earnings to present cash value. Appraisers often apply a multiply or discount is applied depending on the circumstances. If the New York business being sold is reliably expected to have high earning levels in the short term (three to five years out), this can be a suitable method.

Capitalization of earnings is based on an assumption of relatively stable year-to-year cash flow. In other words, the seller doesn’t expect a significant cash flow/income surge shortly. The appraiser would then value the business based on a return-on-investment analysis. For example, imagine two bought companies for $1 million; one business nets $10,000 a year, and the other nets $100,000 a year. The second hypothetical business provides a better return on investment.

EBITDA and SDE valuations

EBITDA is an acronym for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” This is sometimes considered a separate method of business valuation or sometimes considered part of an income valuation method. An appraiser using EBITA focuses less on cash flow and earnings and more on profits to get a “pure profit” number for a business being bought and sold. SDE is an acronym that stands for “Seller Discretionary Earnings.”

EBITA can be an attempt to estimate “pure profit” for a New York business being bought or sold. An SDE analysis is typically done for smaller businesses. With SDE, an EBITDA analysis is run, and all of the seller’s personal expenses — like salary and benefits — are added back in. SDE results in a larger “pure profit.” Again, multipliers and discounts are often applied to arrive at a fair market value for the business (which is then used as the basis for the sales price).

Asset Valuation

Asset valuations look at the business from the standpoint of assets and liabilities. Appraisers use this method if the company sold is “asset-heavy,” having large amounts of equipment or inventory, or some particularly valuable asset such as intellectual property rights. This is an excellent method to use when the target business is merged into another business or liquidated.

Market Valuation

As noted, market valuations use a comparative analysis based on similar businesses in a relevant geographic area or a market niche (like an internet-based retail outlet). These can be complex valuations as there may be a limited number of “comparable” businesses.

Contact Wright Law Firm NYC Today

For more information, or if you are planning to buy or sell a business here in NYC, call the experienced New York business attorneys at Wright Law Firm NYC. To schedule a consultation, please contact our office by e-mail or call us at (212) 619-1500.