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Key Factor Analysis Method Of Business Valuation

By Hoke - Last updated: Thursday, August 5, 2010 - Save & Share - Leave a Comment

Key Factor Analysis is a common means to value a business (others include Historical Comparisons and Business Broker Local Estimate). There are a variety of Key Factor Analysis models using computer programs or as simple as handwritten calculations.

First the Income Statement is recast to arrive at Recast Discretionary Income. Then the Recast Discretionary Income is multiplied by a Multiple to arrive at the Business Valuation. An accurate Recast Discretionary Income is vital since any inaccuracy will be magnified by the Multiple.

To estimate the Multiple a variety of Factors are assigned values which are averaged to arrive at a multiple. The Factors can vary from model to model but they usually include; Number of Years the Business Has Operated, Number of Years the Owner has Owned the Business, Owners Required Down Payment Percentage, Amount of Competition, Industry Trend, Location and Facilities, Marketability, Historical Profit Trend, Ease of Replication and Amount of Risk.

You can ask your Business Broker to prepare a Business Broker Business Valuation so that you have objective pricing data. The experienced Business Broker’s local and up-to-the minute opinion should also be considered, especially in this unstable 2010 economy, . The Business Broker’s valuation is more brief (and less costly) than a Formal Business Appraisal.

Keep in mind when you are selling a business, ultimately the market determines the final price which is what a Buyer will pay.

I will be adding a Key Factor Analysis Model that visitors can use to calculate the Key Factor Multiple for their own business. So check back, or drop me an email and I will let you know when it is added to this site.


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