How to do Benchmark Valuation?

Conducting an efficient valuation system is a challenging task and it involves a series of complicated steps and analysis. It is vital to analyze the value of the business as per the nature of the business and should be in line with the valuation of similar businesses of the same industry. Various firms perform valuation services for their clients and then conduct the benchmarking process as well. Benchmarking refers to the process of selecting valuation multiples and comparing them against similar businesses. Of course, every business is different, and ‘one fit for all’ cannot be applied to each business, however, benchmarking is based on the theory that similar nature businesses have common valuation multiples.

Before conducting the benchmark valuation services, it is important to pay attention to the following:

• Revenues: It refers to the total amount of money that a company earns through its various business activities. It is also known as top-line as it doesn’t include any expenses.
• EBITDA: It is the short-form used for earnings before interest, taxes, depreciation, and amortizations. These include earnings of the business before accommodating the above-mentioned expenses.
• Seller’s discretionary earnings (SDE): This amount is calculated by adding the owner’s salary to EBITDA. It is one measure of earnings to an operator or owner of the business.

When conducting benchmark valuation services for the business you compare the above financial metrics to metrics of comparable selling businesses. These financial metrics are often converted into ratios to assist equally compare companies of various sizes. The key to benchmarking is to contemplate a bunch of companies in an industry. The next step involves taking the middle or median of the set of numbers. The median is preferable because it eliminates outliers which can skew the average.

Business appraisers typically use median (and sometimes average) selling price ratios for the industry to make a general ballpark for the corporate requesting a valuation. They then apply a weight to every estimated value to work out a final value. counting on the case, revenues or EBITDA could also be more important than SDE so more weight could also be applied to the value.

Industry Benchmarks

One good thing about employing a qualified business valuation specialist is their access to industry benchmark data. Business appraisers have access to databases that detail the financials of personal businesses. These databases are often organized by industry. The appraiser can then compare selling price ratios of specific business types to other businesses within the same industry. Also, to general industry data, the database may narrow the search to specific business types therein industry. as an example, construction contractors are a general industry with HVAC contractors being a segment within the industry.