Section 10: Basics of business valuation Flashcards
What are three principal approaches to valuation?
income approach
market approach
asset approach
What are various purposes of the valuation?
- selling a business to a third party
- transferring ownership to family via gifting
- litigation between shareholders
- divorce action between husband and wife
- establishing value for estate tax determination
- installing and ESOP
- acquiring a business
Determining transaction price
Price and terms
- hold-back of proceeds (escrow)
- seller financing
- performance payments
- earn-out provision
- non-competition agreement
- employment agreement and / or consulting agreement
- contingent and unknown liabilities
FMV
Fair Market Value
- price at which the transaction will occur between a “hypothetical” willing buyer and seller
Investment value
the value to a particular investor based on individual investment requirements and expectations
Intrinsic or fundamental value
The value that an investor considers, on the basis of an evaluation of available facts, to be the “true” or the “real” value that will become the market value when other investors reach the same conclusion
What are types of buyers and sellers
- Hypothetical buyer and seller
- Financial buyer
- Strategic buyer
- Family members
Additional adjustments to a valuation
- size
- concentration of credit
- keyman
Income approach to valuation
- discounted cash flow method (DCF)
- capitalized earnings method
DCF
DCF is predicated on a specific future look at economic benefits
Financial projection
EBITDA and EBIT
the future stream of benefits is discounted by an appropriate rate of return (Cost of capital or discount rate)
Capitalization of earnings method
complimentary to DCF
best used when future cash flows are expected to be consistent and based on past performance
Market approach to valuation
- public company guideline method
- guideline transaction method
Asset approach to valuation
- Reported book value
- Adjusted book value
- Premise of Value
orderly disposition or forced liquidation
Investment banking valuation
Rule of 10
Rule of 5
Super rule of 5
