The traditional business evaluation methods
For business brokers, one the basic rule is the determine what a business is worth. Just as in commercial real estate, there are 3 major methods:
- Income approach. Divide annual income (EBITA, EBIT or EBITDA, etc) divided by capitalization rate.
- Asset approach. This is simple a book value of a business. Sometime, may include goodwill asset value which is beyond physical asset value and could be pretty arbitrary.
- Market approach. This is just a way to let the market determine how a business is worth.
The three methods have been used by many business brokerage professionals. There are lots of dirty details into each approach and each approach could be further divided many sub-categories. However the basic idea stays the same.
It should be noted that while we greatly respect the three methods of the business valution, we at Crebbers believe those three methods only offer a very basic starting point. There are many variables the prevent those methods from getting a better number close to a real market price.
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