Learn how to identify the different approaches for valuing a business.
- The value of a business is based on how well you think that business will perform in the future. As I frequently say in my business school classes, when you buy a business, you are buying it's future, not it's past, and because you are buying the future, you should be surprised that business valuation is not an exact science. None of us can forecast a future perfectly, so none of us can value a business perfectly. If business valuation is about the future, then why do we often use valuation with accounting numbers, which are based on the past? Well, past accounting numbers are useful to the extent that they provide a starting point for forecast in the future. It will be relatively easy to forecast a future for a company that has a long and stable history, it will relatively difficult to forecast a future with a company with a volatile history, or no history at all. So we will naturally have more confidence in some business valuations than in others. When estimating a numerical value for a business, its value, a standard assumption is that a hypothetical sale from a buyer to a seller will be an orderly sell, not a forced sale, a hasty sale, or a fire sale. We know that in a crisis situation, a person might sell a car or a house or a business at an artificially low price because that person needs cash quickly, or has a time deadline for closing the transaction. These fire sale prices are not good estimates of the value of an asset. Also when estimating a numerical value of a business, an additional assumption is that the seller and the buyer are informed about the details of that business, and that the seller and the buyer are unrelated. For example, let's say I have proposed selling a small trucking business to my brother, Jim, or 100,000 dollars. That 100,000 dollar price is not a good reflection of the value of the business. First of all, my brother, Jim, doesn't know anything about the trucking business, so he doesn't have the information necessary to negotiate a fair purchase price. Any reliable value is one that would be aggressively negotiated between an informed buyer and an informed seller. Second of all, my mother would expect me to give my brother a good deal, so a related party price does not reflect what a business is really worth. Those are some general appraisal or valuation concepts. In the field of asset appraisal, there are three primary asset valuation techniques: the market approach, the income approach and the cost approach. We'll discuss these three approaches in detail.
Released
3/5/2019- Determine the parts of an income statement.
- Review the different parts of a statement of cash flows.
- Analyze common-size financial statements.
- Define ratio analysis.
- Explain current ratio.
- Distinguish the steps in the operating cycle.
- Examine how to determine the day’s sales in inventory.
- Explore how to calculate the average collection period.
- Identify the fundamentals of analyzing cash flows.
- Explore business valuation while examining the intersection of accounting and finance.
Skill Level Beginner
Duration
Views
Related Courses
-
Accounting Foundations: Managerial Accounting
with Jim Stice2h 25m Intermediate -
Finance and Accounting Tips
with Jim Stice3h 57m Beginner -
Cost Accounting: Analyzing Product Profitability
with Rudolph Rosenberg56m 49s Intermediate
-
Introduction
-
1. Quick Review of Financial Statements
-
Review of the balance sheet4m 49s
-
2. Analyzing Financial Statements
-
3. Ratio Analysis: DuPont Framework
-
Ratio analysis3m 27s
-
Return on equity2m 26s
-
DuPont framework4m 52s
-
Current ratio4m 12s
-
Debt ratio4m 10s
-
Price-earnings ratio3m 39s
-
4. Ratio Analysis: The Operating Cycle
-
The operating cycle3m 46s
-
Days sales in inventory3m 49s
-
Average collection period3m 31s
-
Days purchases in payable3m 28s
-
Real world: Procter & Gamble3m 21s
-
5. The Statement of Cash Flows
-
Analyzing cash flows2m 22s
-
What does it tells us?4m 21s
-
Cash flow patterns2m 32s
-
One method of analysis4m 37s
-
Two methods for presentation4m 14s
-
6. Forecasting Financial Statements
-
The initial assumptions1m 48s
-
Forecasted retained earnings2m 25s
-
Forecasted assets2m 42s
-
7. Intro to Business Valuation
-
8. Valuation: Using Multiples
-
The Microsoft IPO3m 46s
-
Earnings multiples3m 32s
-
Equity multiples3m 38s
-
Sales multiples4m 23s
-
-
9. Valuation: Free Cash Flows
-
Buying the Hong Kong car?2m 26s
-
Risk and interest rates3m 44s
-
Forecasting cash flows4m 22s
-
-
10. Valuation: Comparing Models
-
Brief McDonald's history2m 53s
-
McDonald's: The numbers2m 41s
-
-
Conclusion
-
Next steps3m 4s
-
- Mark as unwatched
- Mark all as unwatched
Are you sure you want to mark all the videos in this course as unwatched?
This will not affect your course history, your reports, or your certificates of completion for this course.
CancelTake notes with your new membership!
Type in the entry box, then click Enter to save your note.
1:30Press on any video thumbnail to jump immediately to the timecode shown.
Notes are saved with you account but can also be exported as plain text, MS Word, PDF, Google Doc, or Evernote.
Share this video
Embed this video
Video: Value is based on expectations about the future