Our valuation services apply to appraisal of closely held businesses and of partial business interests, including valuation of equity and debt components of capital structure. The business context may be tax related, for an acquisition or divestiture, a buy-sell agreement, an ESOP, a fairness opinion or in connection with bankruptcy. These services also apply to valuation of intellectual property, patents, trademarks and copyrights.
Business appraisers often state that their appraisals are based on an “income” approach and a “market” approach. Modern financial-economic theory, however, reveals that these “approaches” are not really different but just use available data differently.
Rational economic behavior requires that the value of a capital asset should be equal to the sum of the future values of money that can be withdrawn from the asset, subject to appropriate adjustments for the time-value of money and risk. After financial formulas are applied, the ratio of the computed value to current sales or profits can be calculated.
The “market” approach to valuation uses current data on such ratios for “comparable” companies to infer the value of the subject company from its current sales or profits. The “income” approach uses historical financial data to infer the future withdrawable amounts of money. The financial formulas used to calculate value from these future amounts are based on data on the historical pricing factors that convert future amounts to present values.
From these considerations, it is clear that both methods are market-based. Only an economic approach to valuation can properly integrate the required data and reconcile the apparent inconsistencies between the “market” and “income” approaches while also providing an economic rationale for the valuation conclusion.
Business valuation and damages valuation have much in common. Both rely on a projection of future money amounts to determine present values. For the business valuation the future amounts are withdrawable cash. For the damages valuation the future amounts are losses. The financial formulas used to convert a time-sequence of future money amounts to a lump-sum “present” value are essentially the same.
