An income approach focuses on the expected benefits from investing in the business and the required return for assuming the risk and uncertainty associated with achieving these benefits. This popular method can account for changes in revenue growth expectations, working capital needs, future capital expenditure requirements, as well as differences in financing. Cash flow projections are typically developed by management and the valuation assumptions are analyzed by Allied Business Group for reasonableness. The likelihood of achieving these projections is considered in determining the rate of return that an investor would require. For companies that do not develop long-term financial projections on a regular basis, Allied Business Group can assist management with the development of these financial projections for purposes of the appraisal.
Market Approach
The market approach involves the application of pricing multiples based on similar transactions. The most common pricing multiples are P/E, as well as Revenue and Earnings multiples. At Allied Business Group, we perform extensive research to identify similar publicly held companies, as well as closely-held businesses that have recently changed hands. If reasonably similar public companies or private market transactions are identified, pricing multiples based on this peer group may be used. In applying these pricing multiples to the business, adjustments are often made to account for differences in investment characteristics, such as growth potential and relative risk. When close comparisons to public companies cannot be made, or when private market transactions provide limited information, the market approach may still be used as a test of reasonableness for other valuation methods.
Cost or Asset Approach
The Cost Approach measures the value of an asset by the cost to reconstruct or replace it with another of like utility. In business valuation, this approach is often referred to as the adjusted asset, adjusted book value, or adjusted balance sheet approach. This technique entails a restatement of the balance sheet by replacing the book value of assets and liabilities with their respective fair market values. This approach is frequently used in valuing holding companies or businesses that are significantly under-performing. It is often an inappropriate valuation approach for companies having significant intangible value. However, a cost approach may also be used to establish a floor value for a business using a liquidation method.
