An Introduction to Business Valuation

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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 goodwill.

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.

BUSINESS VALUATIONS - 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.

INCOME APPROACH

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.

METHODS UNDER THE INCOME APPROACH:

* 1) Capitalization of Earnings

2) Capitalization of Cash Flow

* 3) Excess Earnings (considered as a Hybrid

Method using Income & Asset Approach Characteristics)

4) Discounted Cash Flow

* 5) Discounted Earnings