CHAPTER 2Valuation Basics
This chapter covers the basic business valuation assumptions and methodologies that are the necessary building blocks of every estimate of value.
VALUATION IS MODELING
Business valuation is the process of taking a subject company and, through the application of different models, estimating a value. Different models work best in different situations. Each model is generally referred to as a method in business valuation. Selecting the correct model is done using professional judgment, reviewing all available information along with the standards of value and purpose of the valuation.
A key concept is that business valuation models tend to be comparisons. In each case, there are two sides to the comparison: the subject company and the comparables. It is important to try to align the two sides as closely as possible. When that is not possible, it may make sense to use another model. Sometimes there is no model that is close and more professional judgment than is typical will be required.
There is no perfect method, only useful methods. However, even a useful method can be applied in a misleading way. At every level, selection of the model and then proceeding to choose and screen the inputs for comparison, are key to a supportable valuation.
All comparisons have shortfalls. There is no perfect data on either side of the modeling equation. Our job as valuators is to impartially align the two sides and then account for variances where possible, using the ...
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