Ever wonder what your company is worth? As management consultants serving Architecture, Engineering, Planning, Landscape Architecture, and Environmental consulting firms, we’re often asked this questi0n and it’s not a question to be taken lightly. Use the wrong approach to business valuation and ownership transition can be a nightmare. The three approaches used in business valuations are:
Asset Approach. This is an appraisal of the firm’s tangible assets if it were to be sold today. This includes inventory, equipment, real estate, etc. Another term for this approach is Book Value (Tangible Assets minus Liabilities). In general, this is not a good way to calculate the value of a design firm because it doesn’t include goodwill.
Market Approach. Residential real estate appraisers typically use this approach when evaluating residential properties. These types of appraisers will typically research recent sales of area homes that are similar to the one they are asked to appraise. Using this approach to value an Architecture firm would require the appraiser to identify and use recent sales of other Architecture firms (offering similar services in similar markets).
Income Approach. In a service industry like the design industry, the real value of an A/E firm is usually with its staff, client relationships, project experiences, etc. Another term for this is goodwill and can be calculated using a number of different methods based on the firm’s historical and future earnings (cash flow) potential.
For more information, click here to visit the American Society of Appraisers Web site.
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