Introduction to Business Valuation
4) Intrinsic Value. The inherent value an investor
considers, after evaluation of all available facts, to be the true or real
worth of a business.
5) Going Concern Value.
The value of the company as an operating business, i.e. , the value of systems,
procedures, plant and factory arrangements, in place management, established
distribution, advertising and marketing networks, employee training, supply
sources and contacts, customer lists, concepts implemented and working and
the value of other intangible elements of the business, particularly its
6) Liquidation Value.
The value of the business that would result from selling its assets and
settling its liabilities. There are basically two types of liquidation values:
a) Orderly Liquidation
Value. The assets will be sold off within a reasonable period of time,
that is, six months to a year.
b) Forced Sale Value.
This type of liquidation assumes that the assets will be sold as quickly
as possible, such as through an auction.
7) Book Value, or Net
Book Value as it is often called, is an accounting term relating to the
historical cost of the assets as carried on the books and records of the
company after deducting an allowance for depreciation.
- APPROACHES AND METHODS
The value of a business
is derived from its future benefits but those benefits cannot be measured
with great certainty. All companies have different earnings, and different
associated risk factors. Therefore, different approaches and methods have
evolved over the years . These approaches and methods provide us with the
ability to determine the estimated future value of the business.
There are three basis
approaches to business valuation: The Income Approach, The Market Approach
and The Cost or Asset Approach. Within each approach, there are a number
of methods employed. Our list is not intended to be all inclusive but the
most applicable and popular for business brokers will be discussed in detail.
The Income Approach
is defined as: A general way of determining a value of a business or equity
interest in a business by using one or more methods wherein the value is
determined by converting anticipated benefits, (i.e., normalized or restated
cash flows, pretax earnings, or after tax earnings) into a value. The methods
under this approach will usually apply some form of capitalization rate
to these anticipated benefits.
THE INCOME APPROACH:
* 1) Capitalization
2) Capitalization of
* 3) Excess Earnings
(considered as a Hybrid
Method using Income
& Asset Approach Characteristics)
4) Discounted Cash
* 5) Discounted Earnings