Value indications developed in applying methodologies appropriate to the business are weighed and reconciled with other facts depending upon the type of business being appraised, and the quantity and quality of the data available in order to form a conclusive opinion of value.
Capital Market Method
This method utilizes the premise that the value of the business should be determined based on what astute and rational capital market investors pay to own the stock of similar guideline companies. Public companies are required to disclose detailed financial information. The capital market method is an appropriate valuation approach in cases where publicly-traded guideline companies are available. Capital market ratios of publicly-traded guideline companies are utilized to estimate the value of the subject firm.
A form of the income approach, the discounted cash flow analysis, is based on the premise that the value of the business is the present value of the future cash flow to be obtained by the owners of the business. This approach requires analysis of revenue, expense, working capital, financing, investment, capital structure, residual value and discount rate (including business risk). Another method is the direct capitalization of cash flow. This method is similar to the discounted cash flow in that a risk-adjusted discount rate is used along with a growth rate to convert a cash flow or cash flow stream to a present value.
Transactional Market Method
The value of the business is determined by comparing the subject firm to guideline firms that have been purchased or sold during a reasonably recent period of time. Several databases are accessed in our search for data on these transactions.
Under this approach, the value of the subject firm’s assets and liabilities are discretely determined. This approach generally requires an appraisal of current assets, tangible real property, tangible personal property, amortizable intangible assets, and non-amortizable intangible assets. The approach is often used in holding company valuations or when valuing intangible assets.