Asset Approach—The Asset Approach adjusts a company’s assets and liabilities to their fair market values and adds to the Balance Sheet the value of intangible assets and any contingent liabilities. While tangible assets can be appraised and reported on an adjusted Balance Sheet accordingly, the valuation of intangible assets such as reputation, employee talent, etc. is more complicated. Continue reading →

Market Approach—The market approach derives an indication of value by comparing the company to other similar companies that have been sold in the past. The “guideline publicly traded company method” uses the prices of similar and relevant public companies as guidelines for determining the value of a closely held or family controlled business. The “direct market data method” relies on transaction data of similar closely held and family controlled businesses to determine an indication of value. Continue reading →

Income Approach—The Income Approach derives an indication of value based on the sum of the present value of expected economic benefits associated with the company. Under the Income Approach, the appraiser may select a multi-period discounted future income method or a single period capitalization method.  Continue reading →

There are various approaches for business appraisers to utilize in determining the value of a business. Each approach has various methodologies that can be employed to determine the value of a business. The appraiser must then select the appropriate approaches and methods to apply to the company’s specific conditions to arrive at an indication of value. The approaches that the business valuation professional may consider include: Continue reading →

Under the fair market value standard, the hypothetical buyer is assumed to be a purely financial buyer seeking a return on the investment. The “financial buyer” lacks synergies or strategic benefits associated with the transaction. As a result, the fair market value estimate is typically lower than the “strategic value” estimate, which is based upon the price that encompasses synergies or strategic benefits that could be obtained through the acquisition. Therefore, the price that a strategic buyer typically is willing to pay for the company is equal to the fair market value estimate plus the value of any synergies associated with an acquisition of the company. Continue reading →

Business valuation often looks like a “black box” to those not involved in the profession of valuing companies. Entrepreneurs often ask, how do you value a business? In reality, value is a pretty simple concept. The value of any business, publicly-traded stock, or other financial asset is the sum of the present value of the cash flows expected to be generated by that investment. Today’s value is a function of the expected future net cash flows that the owner or investor can expect to obtain from ownership of that asset, discounted to present day at a risk-adjusted discount rate. Obviously, cash flows that may occur five years from now are worth less in today’s dollars due to a number of factors such as risk, the time value of money, etc. Continue reading →