Most of them are just trying to solve an immediate problem or upgrade their lives somehow. Buy a vehicle, finish school, buy a house, start a business or the big one, - get a sugar daddy. Most of the 75 models I've worked with so far have either succeeded or failed by now. Of the dozen or so who remain in my orbit, I wish them the best. I can't take care of them forever, - my mental health is done.
Back to the valuation question. I don't know what was offered to you, but I think you should use the Income Valuation Method to determine your sell price.
The Income Valuation Method
The income approach is based on the premise that a property’s current full cash value is equal to the current value of future cash flows it will provide over its remaining economic life. It is a classic approach to valuation but requires an extensive amount of detail and analysis. The income valuation method has the highest model risk—the risk that your model turns out to be inappropriate—as it relies on many assumptions.
The effort required for using the income method will also, however, often result in a more accurate appraisal, especially when combined with other valuation methods. This approach allows value to be forecasted based on different scenarios and can be used to perform a sensitivity analysis.
There are several steps to applying this approach:
- Estimation of annual cash flows a prudent investor would expect to receive from the subject property over a defined period of time.
- Conversion of estimated cash flows to their current value equivalent using a rate of return that accounts for relative risk of the projected cash flow and the time value of money.
- Estimate of residual value, if any, at the end of the defined projection period.
- Conversion of residual value, if any, to its present value equivalent.
- Addition of the current value of estimated cash flows from the defined projection period to the residual value, if any, to arrive at the company’s enterprise value.
- Deductions for working capital, intangible property, and other excluded assets of the enterprise value to arrive at an indication of value for the subject company’s tangible assets.
The income approach is relevant if the goal is to arrive at a fair and defensible enterprise value. For situations such as establishing value for property taxes, however, tangible property needs to be specifically valued separately;
the income approach does not allow separation by type of asset. The other limitation is that the calculated value is very sensitive to assumptions about the forecast period, the cost of capital, and the terminal growth rate derived; any small changes in these key assumptions can materially impact the assigned value. The COVID-19 pandemic provides a reminder that projections made years into the future may or may not hold true. Cost of capital projections should reflect the risk in achieving the forecast returns; clearly a new restaurant or hotel that opened its doors in March 2020 would not have performed as forecast in a business plan developed a year previously. Therefore, income-based valuations are most reliable for businesses with stable, predictable cash flows.
As previously noted, the income approach can be combined with the cost approach, which will allow the direct valuation of tangible assets and indirect valuation of intangible assets. Intangible assets can also be modeled separately and that value can then be checked from the resulting residual intangible value from the business enterprise income approach. This combined approach will provide a defensible fair value for most purposes where a business valuation is needed, in addition to providing values for different types of assets.
Regardless of the purpose for seeking a valuation, arriving at accurate, defensible values for businesses and/or business assets is an arduous and complicated process requiring the skills of experienced valuation professionals. A business valuation expert has the knowledge and experience needed to choose the best valuation method for your specific needs and calculate a fair and accurate value.
