Business Valuation Concepts and Value Drivers
Standards and premises
Match the standard of value to the purpose: fair market value (hypothetical willing buyer and seller, tax and many transactions), fair value (statutory or litigation contexts), investment value (a specific buyer's synergies). Premise is usually going concern; liquidation is the alternative. Also distinguish controlling versus minority interests and marketable versus non-marketable interests.
Three approaches
Income (capitalized cash flow or discounted cash flow), market (guideline public companies, guideline transactions, multiples), and asset (adjusted net asset or book). A credible report reconciles more than one method.
Normalization
Adjust reported earnings for owner compensation above or below market, discretionary and personal expenses, one-time items, and non-arm's-length rent or related-party transactions. Valuation is performed on normalized, debt-free earnings, then debt and cash are bridged to equity.
Traps
Confusing enterprise value with equity value; treating rule-of-thumb multiples as a valuation; using unadjusted earnings; forgetting that a multiple must be applied to the right metric (EBITDA multiple to EBITDA, not revenue); and ignoring working capital in a debt-free, cash-free deal.
Rule of thumb
Enterprise value minus interest-bearing debt plus excess cash equals equity value - always bridge the two. Worked example: reported EBITDA $1.0M; owner salary $250K versus $150K market (add back $100K); one-time legal cost $50K (add back $50K); normalized EBITDA $1.15M. At 5.0x, enterprise value is $5.75M. Less $1.5M debt plus $0.5M cash gives $4.75M of equity value - the number the owner actually receives before taxes and fees.