Business Valuations
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  • 1. Business Valuation Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes. (c) Dynamic Valuations 2009
  • 2. Purpose of Business Valuation Buying/Selling a business Bank/Equity and other financing Business Strategic Planning Litigation and Taxation Partnership/Shareholder Agreement (c) Dynamic Valuations 2009
  • 3. Elements of Business Valuation Economic conditions Financial Analysis Normalization of financial statements Income, Asset and Market Approaches (c) Dynamic Valuations 2009
  • 4. Income Approach to Business Valuation The income approaches determine fair market value by multiplying the benefit stream generated by the subject or target company times a discount or capitalization rate. The discount or capitalization rate converts the stream of benefits into present value. (c) Dynamic Valuations 2009
  • 5. Asset Approach to Business Valuation The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. Most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible. (c) Dynamic Valuations 2009
  • 6. Market Approach to Business Valuation In certain industries, when businesses change hand on a regular basis, industry-wide rules of thumb are sometimes used to value a company. Examples of such industries include recruitment agencies, accountancy firms, etc. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. (c) Dynamic Valuations 2009