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IRS Revenue Ruling 59-60 states that earnings are preeminent for the valuation of closely held operating companies. However, income valuation methods can also be used to establish the value of a severable business asset as long as an income stream can be attributed to it.
A valuation multiple [1] is simply an expression of market value of an asset relative to a key statistic that is assumed to relate to that value. To be useful, that statistic – whether earnings, cash flow or some other measure – must bear a logical relationship to the market value observed; to be seen, in fact, as the driver of that market value.
An alternative approach to the net asset value method is the excess earnings method. (This method was first described in the U.S. Internal Revenue Service's Appeals and Review Memorandum 34, [further explanation needed] and later refined by Revenue Ruling 68-609.) The excess earnings method has the appraiser identify the value of tangible ...
Generally, the valuation process analyzes all aspects of the business, including the company's management, capital structure, future earnings, and the market value of its assets.
Discounted cash flow valuation is differentiated from the accounting book value, which is based on the amount paid for the asset. [4] Following the stock market crash of 1929, discounted cash flow analysis gained popularity as a valuation method for stocks.
The P/E method is perhaps the most commonly used valuation method in the stock brokerage industry. [9] [10] By using comparison firms, a target price/earnings (or P/E) ratio is selected for the company, and then the future earnings of the company are estimated. The valuation's fair price is simply estimated earnings times target P/E.
Owner earnings is a valuation method detailed by Warren Buffett in Berkshire Hathaway's annual report in 1986. [1] He stated that the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, minus any reinvestment of earnings.
This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand. [18] Multi-period excess earnings method – this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash ...