Uses the net performance of the business for sale purposes (i.e. real profit, not hidden value). The capitalisation rate is also the return on investment (ROI). Market expectation is usually between 30-50% EBIT (earnings before interest & tax), and before one proprietors’ income and discretionary or personal expenses. The required ROI may sometimes be higher for some businesses that are not considered mainstream and will be lower for wellestablished managed businesses. The key is to establish a correct ROI or capitalisation for a particular business after careful consideration of all factors and information relating to the particular business. Establishing a fair market value for a business is vital to the successful outcome of the sale process. McDonald Real Estate business brokers analyse each business with our thorough evaluation process. Most businesses are sold to financially motivated buyers and are valued based on the net operating profit of the business. The most common method of valuing a business is the Capitalisation of Earnings, also called the Earnings Multiplier. This method is used by most professionals and is an effective method to determine a market value for a business as a going concern, through the capitalisation of current and/or sustainable net earnings. This method provides the best ‘Fair Market Value’ and has withstood the test of time. We use this method for appraising a business if it is profitable and has a good operating history. It is widely accepted as the best approach to appraising a business being sold as a going concern and being operated by an owner/manager. The key components of the Capitalisation Method are that it: VALUING A BUSINESS eieio.co.nz
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