Learn why the earnings-based estimate is a good place to start in estimating the value of a business.
- Using accounting-based price multiples…to estimate the value of a business…is a very intuitive and logical approach.…For example, if you want to estimate the value…of my house, you can get a good estimate…by asking me two questions.…One, how large is your house, in square feet?…And two, what have been the selling prices and sizes…of houses in your area that have recently been sold?…So if you know the size of my hypothetical house…is 2,000 square feet, and that similar houses…in the same area have sold for $100 per square foot…during the past few months, you can estimate…that the value of my house is $200,000.…
2,000 square feet multiplied by $100 per square foot.…This multiples approach takes advantage of…the vast amount of information embedded in market prices.…We can use this exact same approach to estimate…the value of a business.…We measure the size of the business using account numbers,…such as net income, equity, the shareholder investment,…and sales.…So let's practice.…We'll start with earnings, or net income.…
- Summarize the two forecasting techniques used to create a complete business plan.
- Analyze the five methods for maintaining financial records for a company and explain what kind of company would require each method.
- Calculate payroll expenses with accuracy.
- Apply the entity concept to hypothetical situations.
- Describe the process for obtaining financing from third-party sources.
- Explain the process for valuing a company.