What’s My Business Worth? Part 2: The Market Method
“What’s my business worth?”

Market Approach
There are actually two things to consider when using the Market Approach to value. The most meaningful is also the most daunting because it requires an enormous amount of research. The article I read suggests that, in order to determine the value of a business using the Market approach, you need to compare the subject business to similar public companies that have been recently sold. Once you find similar companies, compare them with the business you’re trying to find the value of in terms of how long they were in business, how similar the customer base is, are the risk factors similar, how similar is the level of profitability and maybe a dozen other metrics. This is what I mean by “an enormous amount of research”. But the real issue with this advice is the term “public companies”.We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses and to novice business brokers.
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What is “The Market”?
The other aspect of the “market” we want to analyze when we use the Market Approach is a lot easier but no less important.
Specifically, once we do our comparisons and have our numbers, we take a look at the market the business we’re valuing operates in. We want to see if there’s any pending event in that market – geographic, political, regulatory, industry channel, etc. – that would likely impact the the value we just arrived at.
We use an example in our course of a convenience store that has been serving its neighborhood for 10 years with steady but modest annual growth.
We do our comparisons and arrive at the Most Probable Selling Price using the Market Approach. We then start nosing around.
If we find that a 400-unit apartment complex has just been approved for the 30-acre parcel across the road, we know that the “market” is about to add significant value to the business. We go back to our offices, crunch some numbers and come up with a new, more accurate – and to our client, the seller, more appealing – valuation.
Likewise, if we find out that that 30-acre parcel has just be approved for a landfill, we head back to our offices, crunch the numbers and end up with a valuation that will likely be somewhat less appealing to our client.
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Another example would be minimum wage legislation. If the business you’re valuing is located in an area with a government threatening to increase the minimum wage rates, the business’ bottom line – and, thus, value – will likely be negatively impacted – at least until the business is able to increase the prices of its products or services to offset such increased employment costs. Both those examples would fall in the geographic or regulatory categories. But what about an industry-specific example? In the United States, two industries made up of small businesses have been threatened on and off by politicians: payday loan companies and gun shops. Both types of businesses are almost universally small.
The Bottom Line
We use the Market Approach on every valuation. The key points to remember are that there are two ways to look at “the market” and both have to be considered. The issue I took with the information in the article is that the author advised looking at public companies. The market for pubic companies is, of course, the public market. That market is huge with hundreds of thousands of buyers each buying a tiny share or any given company making it easy to determine what any public business is worth. Each such purchase establishes that business’ value based on the “market”; the “market value”. The market for private businesses is tiny by comparison. But that’s where we have to look for our comparable numbers. But you have to also consider the other “market method”; what’s happening in the business’ market because such events can – and will – impact how “the market” will value a business. If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast. I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com