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Business Valuation Methodologies



One of the most common business appraisal valuation methods is Future Maintainable Earnings (FME).

This method places a value on shares or a business by estimating the likely Future Maintainable Earnings (FME), capitalised at an appropriate rate which reflects business outlook, business risk, investor expectations, future growth prospects and other entity specific factors.

The FME approach is the most commonly applied valuation technique and is particularly applicable to businesses with relatively steady growth histories and forecasts, regular capital expenditure requirements and non-finite lives.

The FME used in the valuation can be based on net profit after tax or alternatives to this such as EBIT or EBITDA.

The capitalisation rate or "earnings multiple" is adjusted to reflect which base is being used for FME.

The area of widest interpretation and therefore widest difference of opinion lies in how much to pay for the future earning potential of a company - how many multiples of its past profit to accept as a fair valuation. For a normal SME, this may vary between 1-4 but a lot of factors can affect this.

For some businesses, the FME method may not be suitable:
• Early stage high growth businesses
• Businesses who are investing heavily to grow revenue
• Businesses which do not yet have positive earnings or profit.

Please contact me if you wish to discuss business appraisal valuations and what your business may be worth.

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