In January 2007, Inc. Magazine conducted a study of private business valuation to learn which types of businesses command a premium against dieir earnings when they're sold. What diey found was diat companies doing business in the life sciences, energy, financial services, and technology sectors commanded high sales multiples with median sales prices of $100 million, while day-care centers, plumbers, and retailers produced very modest multiples, with median sales prices of $100,000. The most valu¬able types of companies were garnering 16:1 ratios of their sale price to their annual revenue while the discount zone businesses commanded 8:10 ratios and worse
The following sections examine some financial measures for business valuation. The first thing to know about valuation is that nearly all techniques rely on the analysis of the future market for the company's products. This is why neither book value nor liquidation value is a satisfactory method, except to establish a residual value to use in a discounted cash flow method. Further, with more businesses—and more new businesses—relying on intangible assets, book value does not make sense. Market multiples such as price/earnings (P/E) ratios are often used by venture capi¬talists, but their use is speculative because they are based on public companies in the industry and on the bet that the new company will go public in three to five years. The discounted cash flow (DCF) method is probably the technique most commonly used to account for the going-concern value of a business, but it has problems as well. In the following sections, we look at several of the more commonly used meth¬ods for applying a value to a business. In general, a combination of methods will help the entrepreneur arrive at a range of possible values.