Why can’t a “rule of thumb” be used to value a business?
While there are certain multiples of net income or discretionary cash flow that can be used for business entities, in general a rule of thumb does not consider a specific business’s financial characteristics, inherent risks, and ownership attributes.
What methods are used to value a business?
Depending on the purpose of the valuation and the type of report required, an asset approach, an income approach, and a market approach may be considered. Often times all three approaches are used and a weighting of each is subjectively applied by the appraiser.
Why are certain “discounts” applied to a business valuation?
Depending on the ownership interest being valued, a discount for lack of control (if valuing a minority interest who cannot affect the business operations), a discount for lack of marketability (time needed to sell the interest), or both discounts may be applied to the value.