There are three popular approaches that are used to estimate enterprise and equity value and are known as the following:
The asset based approach is defined in the International Glossary of Business Valuation Terms as “a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.”2 Any asset-based approach involves an analysis of the economic worth of a company’s tangible and intangible, recorded and unrecorded assets in excess of its outstanding liabilities.
The concept behind the Market Approach is that the value of a business can be determined by reference to reasonably comparable guideline companies (“comps”) or similar private company sales transactions for which transaction values are known. The values may be known because these companies are publicly traded or because they were recently sold and the terms of the transaction were disclosed. However, unlike real estate comps, similar business comps tend to be hard to find and even if comps are available the complete terms of the transactions are not and therefore this approach tends to be hard to rely upon.
Revenue Ruling 59-60 clearly requires that an Income Approach be used which is where “the earning capacity of the company,” is the primary factor to be considered. The Income Approach is defined in the International Glossary of Business Valuation Terms as, “A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount.”
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