The following are a list of classification of business risks with applicable capitalization rate for the year 2013.
This can help make a determination on whether your businesses market value is at the point where you can optimally sell it for the largest profit margin.
Note: These rates are subject to change with economic conditions.
Class 1:
Old established businesses with large capital assets and excellent goodwill. Unfortunately, few enterprises qualify.
Capitalization rate: 13% (7.5 times earnings)
Class 2:
Well established businesses requiring considerable managerial care. Includes a great number of older successful concerns.
Capitalization rate: 17% (6 times earnings)
Class 3:
Well established businesses involving possible loss as a result of general economic conditions. Product or commodity risk makes them vulnerable to depression. Considerable managerial care but little specialized knowledge required.
Capitalization rate: 20% (5 times earnings)
Class 4:
Business requiring average managerial ability and a relatively small capital investment. Established goodwill but in highly competitive fields. Includes a great number of medium sized companies.
Capitalization rate: 33% (3 times earnings)
Class 5:
Small businesses in highly competitive fields. Small capital investment required. Anyone may enter the field.
Capitalization rate: 33% (3 times earnings)
Class 6:
Large and small businesses depending on special, often unusual, skills of a small group of managers. Small capital required. Highly competitive field with a high mortality rate.
Capitalization rate: 67% (1.5 times earnings)
Class 7:
Personal services businesses. No capital investment required. Dependent on personal skill of manager. Required intensive and thorough knowledge of a subject. Cannot be sold without manager.
Capitalization rate: 143% (.7 times earnings)
Class 8:
Professional practice. Highly technical, totally dependent upon the specialized knowledge of the professional. Sale is often restricted to other professionals in the same industry. Practice may have heavy capital investment requirements.
Value is usually based upon value of assets including customer list.
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