Under the market approach, a business’s value is derived by comparing it to real-life transactions involving similar private or public companies. This article outlines common pricing multiples, such as price-to-earnings and price-to-discretionary-income, and discusses some pros and cons.
Many business owners plan to reinvest their tax savings from the Tax Cuts and Jobs Act (TCJA) into their operations. Strategic investments shouldn’t be made solely on gut instinct, however. This article explains the importance of projecting cash flows and using them to calculate the accounting payback period, net present value (NPV) and internal rate of return (IRR) to evaluate a project’s potential. A sidebar provides a reminder of TCJA provisions that are expected to lower business taxes.
Valuing a business using projected earnings is a complex undertaking. This article identifies common pitfalls that novice or untrained valuators tend to make when using the income approach. A sidebar compares and contrasts two methods that fall under the income approach: the capitalization of earnings and discounted cash flow methods.