Excess Earnings Method of Valuation – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What is the Excess Earnings Method of Valuation? Another earnings-based method is excess earnings. This method discounts company earnings based on two capitalization rates: a rate of return on tangible assets and a rate attributable to company goodwill. The method is...

Discount Future Cash Flows – Valuation Method

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What is the Discounted Future Cash Flow Method of Valuation? The Discounted Cash Flow (DCF) method uses the projected future cash flows of the business after subtracting the operating expenses, taxes, changes in working capital, and capital expenditures. This figure...

Build Up Method – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What is the Build-Up Method of Valuation?In the “buildup method” valuation begins with the risk-free rate. The individual valuing the firm then makes the subjective determination of what percentage to add to the risk-free rate. The amount added depends...

Earnings Capitalization Method – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What is the Earnings Capitalization Model?The earnings capitalization model values the company based upon the company earnings. To determine normalized earnings, you calculate a weighted average of earnings over a period of years. The earnings reported on financial...

Income-Based Valuation Methods – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What are Income-Based Valuation Methods? Income based approaches value a business based upon the past, current, or expected future cash flows of the business and the risk that the business will not produce the desired return. Estimating and valuing flows of income is...

Issues with Market-Based Valuation Methods

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

Issues Associated with Market-Based Valuation MethodsAs will all valuation methods, market-based valuation methods have negative aspects – particularly when they are used to value startup ventures. Some of the notable issues with market-based approaches are...

Characteristic Based Ratios – Valuation

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

Common Characteristic-Based Ratios or MultiplesThe following subsections contain a non-exclusive list of characteristic-based ratios used to value a business. These ratios are derived from a comparable transaction, firm, or industry. Sometimes, multiple ratios are...

Comparables (Business Valuation) – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

Types of Comparables Used in Business ValuationA company may be valued using any number of characteristics about the business. In general, the price of that company’s total equity is compared to some value characteristic of the company, such as the before or...

Market Based Business Valuation – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What is a Market-based Approaches to Valuation?Market-based approaches value the business based upon the productive characteristics of the business in a given market. These methods focus on comparisons of like businesses, transactions, or industries (known as...

Liquidation Value (Valuation) – Explained

by TheBusinessProfessor | Feb 23, 2025 | Business Finance, Personal Finance, and Valuation Principles

What is Liquidation Value Method of Business Valuation?Liquidation value is an asset-based method based upon the value that the business would immediately receive upon selling the asset on the open market. Immediately means selling the asset within a six to twelve...