What are the valuation methods for a closely held business?
While certain business enterprises are valued as a multiple of gross revenues, other businesses might be valued based upon their assets. This can be done by taking the fair market value of tangible assets and then determining if there are excess earnings that may be attributable to goodwill (pursuant to Revenue Ruling 68-609). A third valuation alternative, the capitalization method, uses the following formula: Value = Net Operating Income (NOI) or Net Cash Flow (NCF)/ Capitalization Rate NOI (operating revenue minus related expenses) or NCF does not include any financing expense or depreciation. EBDITA (earnings before depreciation, interest, taxes, and amortization) can also be substituted in the numerator. If the calculations encompass multiple years of past business activity or future business projections, these can be weighted or discounted, respectively. Adjustments usually need to be made to owner’s compensation by factoring in the labor of the departing business executive or ke
