Capitalization
of Income Valuation
Unlike the asset formula, this method places
no value on the equipment or the fixed assets. It
is assumed that they have no value other than the
ability to produce income for the company. Service
companies often fall into this category. This valuation
method does acknowledge the business's intangible
or goodwill value. To place a value on this some
subjectivity is unavoidable. By adding it to the
available cash flow, a valuation can be pegged.
Take the twelve most critical aspects of a business
and place a score of zero to five next to each of
them:
- The owner's reason for selling
- Length of time that the business has
been in operation
- Length of time that
the owner has owned the business
- Degree
of business risk
- Profitability
- Business location
- Growth
history
- Competition
- Entry barriers
- Future potential for the industry
- Customer base
- Technology
Total the figures and divide by twelve. The resulting
figure is the multiplier that plugs into the capitalization
rate formula. Next take the owner's benefit and
multiply it by 75%. The result is the owner's discretionary
cash, which is after debt servicing. The final step
is to multiply the owner's discretionary cash by
the capitalization rate multiplier.
These are just two of the many valuation models
that can be used to value a business. The most
prudent method is to use several different models
(at least three) so as to triangulate on a valuation
figure. Amerigo
Corporate Finance Partners, LLC can
assist you in valuing either your business or
a company that you have targeted for acquisition.
BUSINESS PLANS OR EXECUTIVE SUMMARIES
We are always looking for new investment
prospects. If you feel you have an opportunity
that would fit with Amerigo´s approach and
strategy, please submit a business plan or executive
summary to the below address or electronically here...
Amerigo Corporate Finance Partners, LLC
20501 Ventura Blvd.
Suite 270
Woodland Hills,
CA 91364 |
