Using the DMDM to Arrive at a Value Estimate: Steps Five and Six

Step five: Estimating the Value of the Target Business.
Once the preceding four steps have been completed, it should be a relatively simple matter to arrive at an estimate of the value of the target business. The manner in which this is done, and the degree of confidence in the resulting estimate, will depend on the quantity of useable transaction data and the method which has been used in Step three to analyze the transaction data. Examples of estimating the value of the target business will be found later in these tutorials.

Step six: Testing the Value Estimate.
Testing the value estimate is an essential part of any business valuation, regardless of the appraisal method(s) used. Such testing may include one or more of the following:

Common sense, or "smell," testing. Does the value estimate make sense?

Comparison with estimated values reached by using other appraisal approaches/methods.

"Devil's advocate" testing. How successfully can the estimated value of the target business be attacked?

Justification for Purchase Test, buyer's cash flow projection. Would a buyer who purchased the business for a price equal to the appraised value, with typical terms of payment, be reasonably satisfied with the future cash flow from the business?

The foregoing and other methods of testing value estimates are amply covered in the literature of business appraisal, and do not need to be repeated here.