Methods of Valuation

Asset Based Approach

The Asset Based Approach is a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.  This approach involves an analysis of the economic worth of a company's tangible and intangible, recorded and unrecorded assets in excess of its outstanding liabilities.

Book Value Method

Adjusted Net Assets Method

Income Approach

The Income Approach is a general valuation approach that uses one or more methods that convert anticipated economic benefits into a present value using a capitalization and discount rate.

Revenue Ruling 59-60 clearly requires that an income approach be used when it lists 'the earning capacity of the company' as a factor to be considered.

Capitalization of Earnings Method

This method is used to value a business based on the future estimated benefits by using some measure of earnings or cash flows to be generated by the company.  These estimated future benefits are then capitalized using an appropriate capitalization rate that reflects the company's risks. This method assumes all assets, both tangible and intangible, are identical parts of the business and does not attempt to separate their valuation. Simply, this valuation method is determined by the ability of the business to generate future earnings and cash flow.

This method is generally used in valuing a profitable business where the business owner or investor's intent is to provide a return on investment in excess of the owner's compensation and future benefit streams or earnings that are likely to be steady or growing at a steady rate.

Discounted Earnings Method

The Discounted Earnings Method is more general in its definition as to the type of earnings that can be used in the valuation. It does not limit the definition of earnings only to cash flows. This method is an income-oriented approach based on the theory that the total value of a business is the present value of its projected future earnings plus the present value at a future point in time when earnings are expected to have a stable growth rate forever, known as the terminal value.

The projected earnings and the terminal value are discounted to the present value using an appropriate discount rate rather than a capitalization rate. The discount rate is determined by using a safe rate of return adjusted to the perceived level of industry risk for the type of business being valued.

Market Approach

The Market Approach is used to determine the value of a business by referencing comparable  guideline companies ("comps") for which transaction values are known.  The values may be known because the business is a public company.  Or with the sale of a privately held company, the approach usually compares publicly traded stock of companies or sales of privately held companies in a similar industry where the terms of the transactions are disclosed..

Katz Valuation Group owns multiple data bases to search both public and private company transactions in selecting comparable companies with consideration given to financial condition, operating performance, and other factors. Multiples are then given to the valuation based on earnings, cash flow, and revenues.

1. Determing a sales or purchase price of a business
2. Estate tax planning
3. Buy-sell agreements
4. Business financing
5. Personal financial statements
6. Some divorce settlements
7. Performance share price calculation