Chapter 1

Introduction to Financial Valuation

There is an ever-increasing need for financial valuation services pertaining to ownership interests and assets in non-public companies/entities and subsidiaries, divisions, or segments of public companies. Many textbooks discuss valuation issues pertaining to public companies and their stock prices. Much of that information also can be used to value nonpublic companies. However, over the past 30 years or so, specific techniques, methods, applications, and models applicable to nonpublic entities and assets have emerged and grown. This text addresses this body of knowledge.

Valuation has many judgmental factors, and this leads to many differences of opinion. This book presents the consensus view of 30 of the leading valuation analysts in the country.

Much of the notation system used in this text is that used by Dr. Shannon P. Pratt (a coauthor of this book) in his various publications,1 a system adopted by the American Institute of Certified Public Accountants (AICPA), the National Association of Certified Valuation Analysts (NACVA), the American Society of Appraisers (ASA), and the Institute of Business Appraisers (IBA) in their business valuation courses.

As a quick reference guide to important factors and concepts, numerous “ValTips” are found throughout the volume. These ValTips are intended to provide guidance and insight on handling key issues as well as to provide practice ideas.

WHO VALUES BUSINESSES?

Many providers and/or users ...

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