Chapter 4

Approaches and Methods — Basic Theories of the Valuation Process

In This Chapter

A step-by-step review of the valuation process

How risk plays a role in valuation

The three primary approaches of valuation: asset, market, and income

The key formulas that get experts to valuation

Okay, so what’s the difference between an approach and a method to finding the value of a particular business? Think of an approach as the expressway you need to get to the right town, and think of a method as a way to get to the right address. Each approach has several methods. We explain the major ones in this chapter and note some additional techniques that people use.

Although you may never put pen to paper — or finger to calculator — in working these mathematical and analytical formulas, you want to understand them, particularly if you’re working with a qualified expert.

No two businesses are exactly alike, even those in the same business operating across the street from one another. Having said that, comparing similar companies can help you identify efficiencies and best practices that boost long-term value. Larger, more complex companies — and the increasing number of companies that consider intangible, intellectual assets the number one source of their value — may need to apply slightly different valuation methods and nonnumerical analysis to get to the bottom of things.


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