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Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests + Website, 2nd Edition by Robert T. Slee

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CHAPTER 10

Incremental Business Value

The world of incremental business value (IBV) considers the creation, measurement, and management of a company's IBV, that is, a return in excess of the corresponding cost of capital.1 This is a dynamic valuation process based on a company's performance. By understanding how value is determined and influenced, owners are better prepared to increase the value of their business. Like the other value worlds (which business appraisers call “standards of value”), the IBV world follows a certain process for deriving value. However, unlike the other value worlds that rely on static valuation, the IBV world enables owners to value their firms on a constant and continuing basis using a dynamic methodology. This chapter shows how private firms can determine IBV, and how owners can increase that value.

The world of IBV is separate and distinct from all other value worlds. The authority here is the academic community and management consulting industry, which developed most of the IBV conceptual framework. Much of this world is defined by what it is not. Although it uses numbers from financial statements, it jettisons many of the accounting definitions of value. For example, book value does not play a part in determining IBV.

Years ago IBV was known as residual income analysis or, later, return on net assets. In many respects, this world is incommensurable with other value worlds. The primary difference is the IBV world generates and uses an incremental ...

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