Our philosophy of business valuation is based on the teaching of the revered late Professor Merton Miller received by Dr. Kamin in his studies of financial theory at the University of Chicago Graduate School of Business.  Professor Miller shared the 1990 Nobel Prize in economics for his pioneering work in the economic theory of valuation and corporate finance.

Professor Miller’s teaching has imbued the entire field of business valuation for both public and private companies.  His teaching led to the phrase “free cash flow” to describe the source of the economic benefit to shareholders that is the basis for attribution of value to share ownership.  Free cash flow is the cash withdrawable from a business after allowing for capital needed for reinvestment to support the firm’s growth opportunities.

Professor Miller’s premise is that the only economically rational basis for valuing a business enterprise is the aggregate current value of all future free cash flows distributable by the firm.  Each future year’s cash flow has a present price per dollar that reflects the time-value of money and the compensation for risk bearing to the future date.  The economically rational value of the business firm is then the price per dollar of each year’s future free cash flow multiplied by the number of dollars of future free cash flow summed up over all the future years in which free cash flow is expected to be generated.

The methodology for valuing corporate securities follows from Professor Miller’s valuation theory for measuring total enterprise value.  Fixed-income securities are valued by discounting to present value the stream of promised interest payments and face value using discount rates that are consistent with their risk ratings.  The value of equity then equals the total enterprise value less the value of the fixed-income securities.  Hybrid securities, such as convertibles, are valued based on appropriate combinations of conventional securities that are economically equivalent.

We apply these principles as follows:

·   Business Valuation—Appraise value of closely held businesses and equity/debt components of capital structure, conforming to Uniform Standards of Professional Appraisal Practice (USPAP).  Purposes include income, estate and gift tax, buy-sell agreements, ESOPs and acquisitions/divestitures.

·   Intellectual Property—Conduct valuations of patents, trademarks and copyrights, accounting for market potential, competition, development costs, product life cycle and duration of protection.  Utilize cost, income and market approaches.

·   Fairness Opinions—Evaluate fairness of terms of transactions to interested parties.  Consider criterion of fair market value as affected by minority and liquidity discounts.

·     Feasibility Studies—Examine and analyze factors affecting return on investment to real-estate and industrial projects.

 

Professor Miller shared the 1990 Nobel Prize in economics for his pioneering work in the economic theory of valuation and corporate finance.

To contact us:

Phone:     323.653.9555

Fax:          323.653.5391

Email:      info@valu-econ.com