The value of a company’s business enterprise is critical and necessary information for management. For public companies, an accurate business valuation is necessary for compliance with numerous Accounting Standards Codifications (ASCs), including ASC 350 “Intangibles – Goodwill and Other.” For private companies, knowing the business enterprise value is a necessary step when dealing with gift and estate taxes, stock compensation, for possible sale of the company or equity interests in it, and for capital structuring. Business enterprise value is the aggregate value of all claims on, and ownership interests in, an operating entity, including interest-bearing debt, preferred equity, and common equity. It is also equal to the value of the entity’s assets, including working capital, real property, machinery and equipment, and intangible assets and goodwill.
Business Valuation Methods
There are three principal approaches for determining the business enterprise valuation of a company: the income, market, and cost approaches.
Income-Based Business Valuation Method
The income approach uses business valuation techniques to convert future benefits to a single, discounted amount. The measurement is based on the value indicated by current market expectations about those future amounts. Valuation techniques include single and multi-period capitalization of cash flow models, option-pricing models such as the Black-Scholes-Merton formula, and binomial (lattice) models.
Market-Based Business Valuation Method
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Using this method, we rely upon stock prices of public companies similar to the subject company, and transaction prices of similar companies. We typically develop a relationship between the market value of the guideline companies to its revenue and earnings. Then we use these relationships, commonly referred to as valuation multiples, to value the business or organization. We multiply the subject company’s revenue or earnings income by the valuation multiples to obtain an indication of the business enterprise value.
Cost-Based Business Valuation Method
The cost approach is based on the principle of substitution, and postulates that a prudent buyer would pay no more for an asset than the cost to replace the service capacity of that asset. In accordance with generally accepted accounting principles, assets are generally recorded at historical cost less accumulated depreciation. Intangible assets may or may not be included on historical balance sheets. Liabilities are reflected at face value, while contingent liabilities are generally not shown. Due to this accounting treatment, the use of book value of the assets and liabilities to estimate the fair market value of the equity may result in a material misstatement of fair market value. The cost approach is most useful when applied to the business valuation of real estate companies, holding companies, heavy manufacturing, and companies for which liquidation is a likely prospect.
Business Valuation Experts
Appraisal Economics has significant experience offering business valuation services to enterprises, from Fortune 500 companies to smaller privately held family businesses. We can value the company in its entirety (debt and equity), value the equity, debt, and options, separately, and value underlying assets, such as real estate, machinery and equipment, and intangibles. Whether it’s for gift and estate tax planning, compliance with Accounting Standards Codifications, or for an anticipated sale, and regardless of the intended audience (Internal Revenue Service, Securities & Exchange Commission, potential buyers, shareholders) Appraisal Economics has the personnel, expertise, and research resources required to provide the comprehensive business valuations necessary.
We can meet your unique business valuation needs. Contact the team at Appraisal Economics today to learn more about our business valuation services.