- 188 -
present value of those cash-flows is determined based on an
appropriate risk-adjusted rate of return.
The asset accumulation method is a cost approach that
estimates fair market value of the subject company based on the
assets and liabilities reflected on its balance sheet. The fair
market values of each company’s assets and liabilities are first
determined and accumulated; then the subject company’s total
equity is calculated by subtracting total liabilities from total
assets. A closely held business owner must have the ability to
liquidate the company to realize fully the value produced by this
method. Thus, the asset accumulation method yields the value of
a controlling interest, because a minority shareholder could not
force liquidation.
The transaction method, another market-based approach,
identifies and analyzes actual transactions (e.g., mergers and
acquisitions) of companies with operations similar to those of
the subject company. As with the guideline company method,
market multiples are derived from the comparable companies and
applied to the financial fundamentals of the subject company.
This method yields the value of a controlling interest because
mergers and acquisitions typically are accompanied by a complete
change of control.
After considering these valuation approaches, Mr. Kimball
concluded that a market-based approach, specifically the
Page: Previous 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 NextLast modified: May 25, 2011