Business Valuation Engagements & Business Valuation Methods
There are two primary types of Engagements:
1. Valuation Engagement: This type of Business Valuation Engagement results in a Conclusion of Value whereby the Certified Analyst must apply valuation approaches or methods that are most appropriate in the Analyst's professional judgment. The final report may be written or oral. The written report may be a Detailed Report or a Summary Report.
2. Calculation Engagement: This type of Business Valuation Engagement results in a Calculation of Value whereby the Certified Analyst and the Client agree to specific valuation approaches or methods. The final report may be written or oral. The written report is called a Calculation Report.
Premise of Value:*
1. Net Book Value: With respect to the business enterprise, the difference between total assets (net of accumulated depreciation, depletion, and amortization) and total liabilities as they appear on the balance sheet (synonymous with Shareholder's Equity). With respect to a specific asset, the capitalized cost less accumulated amortization or depreciation as it appears on the books of account of the business enterprise.
2. Going-Concern Value: The value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems and procedures in place.
3. Liquidation Value: The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either "orderly" or "forced."
4: Replacement Value: The value referring to the current cost of a similar new property having the nearest equivalent utility to the property being valued.
Standard of Value:*
1. Fair Market Value: The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. (Note: in Canada, the term "price" should be replaced with the term "highest price.")
2. Fair Value: The value of the shares immediately before the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be equitable.
3. Investment/Strategic Value: The value to a particular investor based on individual investment requirements and expectations. (Note: in Canada, the term used is "Value to the Owner")
Business Valuation Methods:
1. Asset Based Approach:
a. Book Value Method
b. Adjusted net Asset Method
(i) Going Concern Premise
(ii) Liquidation Premise
(iii) Replacement Cost Premise
2. Income Approach:
a. Capitalization of Earnings/Cash Flows Method
b. Discounted Earnings/Cash Flows Method
c. Weighted Average Cost of Capital (WACC)
3. Market Approach:
a. Guideline Public Company Method
b. Comparable Private Transaction Method
c. Prior Sales of Interest in Subject Company
d. Dividend Paying Capacity Method
4. Miscellaneous Approaches:
a. Excess Earnings - Treasury Method
b. Excess Earnings - Reasonable Rate Method
c. Rules of Thumb (Sanity check only)
d. Justification of Purchase (Sanity check only)
* as defined by the International Glossary of Business Valuation Terms
1. Asset Based Approach: Used in determining a value of a business, based on the value of the assets net of liabilities. Usually the assets and liabilities (including off-balance sheet, intangible, and contingent) are adjusted to their fair market values.
2. Income Approach: Used in determining a value of a business by converting anticipated economic benefits into a present single amount. The fundamental formula of this business valuation method is identified as:
Value = Benefit / Risk
3. Market Approach: Used in determining a value of a business by comparing the subject company to similar businesses of similar nature in the same industry.
4. Excess Earnings Approach: Used in determining a value of a business as the sum of a) the value of the assets derived by capitalizing excess earnings, and b) the value of the selected asset base. This method can also be used to determine the value of intangible assets.