Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses, Fifth Edition

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    Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses, Fifth Edition 09/30/2017 Product #: PBV1701P
    AICPA Member: $129.00
    Non-Member: $169.00

This fifth edition simplifies a technical and complex area of practice with real-world experience and examples. Expert author Gary Trugman's informal, easy-to-read style, covers all the bases in the various valuation approaches, methods, and techniques. Author note boxes throughout the publication draw on Trugman's veteran, practical experience to identify critical points in the content. Suitable for all experience levels, you will find valuable information that will improve and fine-tune your everyday activities.

This edition has been updated to include:

  • A new chapter on valuing stock options, preferred stock, debt, and start-up ventures
  • Discussion of economic obsolescence
  • Downloadable content that offers a full range of additional materials including a workbook, cases, sample reports, and one of the most comprehensive bibliographies in the business
  • A special access link to Business Valuation Resources that will allow you to download many of the court cases that are discussed throughout the text
  • Updated real-world examples and exhibits

Key Topics

  • Valuation standards
  • Theory
  • Approaches
  • Methods
  • Discount and capitalization rates
  • S corporation issues
  • Much more


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The asset-based approach is also commonly known as the cost approach or the replacement cost approach. Sometimes you may even see this approach called the asset accumulation approach. In this approach, each component of the business is valued separately. This also includes liabilities. The asset values are totaled, and the total of the liabilities is subtracted to derive the value of the enterprise.

The valuation analyst estimates value by adjusting the asset values of the individual assets and liabilities of the business to fair market value. Some valuation analysts will use this approach for the tangible assets only and consider it to be complete. In fact, I used to do this. However, as we get older, we get wiser. This approach, like the market and income approaches, is intended to value the entire company. This means that the tangible assets, as well as the intangible assets, should be valued and the liabilities subtracted. You may have to use other approaches to value the intangible assets, but I will discuss that later. If you only use this approach to value a company, you could overstate the value of the business as a going concern because if there are insufficient earnings to support the asset base, you will end up with a higher value under this approach than the other approaches.

I used to think that valuing the tangible assets and liabilities would result in a “floor” value for an enterprise being valued as a going concern. I hate to admit it, but I was wrong. The purpose and function of the assignment (remember that from the beginning of this book?) has a lot to do with whether it can truly be a floor value. I will address this in greater detail later in this chapter.


The asset-based approach is most commonly applied to the following types of business valuations:

  • Not-for-profit organizations
  • Holding companies
  • Manufacturing companies
  • Asset intensive companies
  • Controlling interests that have the ability to liquidate assets
  • In all of these instances, the valuation subject will have most, if not all, of its value in its tangible assets or identifiable intangible assets, such as copyrights, patents, or trademarks. Intangible assets, such as goodwill, will not play an important role in the value of this type of enterprise. If goodwill or another type of intangible value exists, it will be added to the value.

    This approach is generally not used for the following types of business valuation assignments:

  • Service businesses
  • Asset light businesses
  • Operating companies with intangible value
  • Minority interests, which have no control over the sale of the assets
  • Service businesses and asset light businesses generally get the bulk of their value from intangible assets. Therefore, it seems logical that the asset-based approach would not be an effective means of valuing these types of entities. Operating companies are generally valued based on the ability of the company to generate earnings and cash flow and, therefore, rely on a market or income approach for the determination of their value. If you recall, Revenue Ruling 59-60 indicates the following in Section 5:

    Weight to Be Accorded Various Factors. The valuation of closely held corporate stock entails the consideration of all relevant factors as stated in section 4. Depending upon the circumstances in each case, certain factors may carry more weight than others because of the nature of the company’s business. To illustrate:

    (a) Earnings may be the most important criterion of value in some cases whereas asset value will receive primary consideration in others. In general, the appraiser will accord primary consideration to earnings when valuing stocks of companies that sell products or services to the public; conversely, in the investment or holding type of company, the appraiser may accord the greatest weight to the assets underlying the security to be valued.

    (b) The value of the stock of a closely held investment or real estate holding company, whether or not family owned, is closely related to the value of the assets underlying the stock. For companies of this type, the appraiser should determine the fair market values of the assets of the company. Operating expenses of such a company and the cost of liquidating it, if any, merit consideration when appraising the relative values of the stock and the underlying assets. The market values of the underlying assets give due weight to potential earnings and dividends of the particular items of property underlying the stock, capitalized at rates deemed proper by the investing public at the date of appraisal. A current appraisal by the investing public should be superior to the retrospective opinion of an individual. For these reasons, adjusted net worth should be accorded greater weight in valuing the stock of a closely held investment or real estate holding company, whether or not family owned, than any of the other customary yardsticks of appraisal, such as earnings and dividend paying capacity.

    Minority interests will usually not be valued using an asset-based approach, because the minority shareholder does not have the ability to liquidate the assets. However, do not take this as a hard and fast rule. In chapter 21, I discuss valuing limited partnership interests in family limited partnerships, which is similar in many respects to valuing minority interests. All of this stuff will be explained further in my discussion about adjusting the balance sheet later in this chapter. Meanwhile, as a general rule, if the shareholder cannot get to the cash flow that will be generated by selling off the assets, this approach will not get to the value of the cash flow to the minority shareholder. After all, value is based on the future benefits stream that will flow to the investor.

    About the Authors

    Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS

    About the Publisher


    About the AICPA The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 412,000 members in 144 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, and offers specialty credentials for CPAs who concentrate on personal financial planning; forensic accounting; business valuation; and information management and technology assurance. Through a joint venture with the Chartered Institute of Management Accountants, it has established the Chartered Global Management Accountant designation, which sets a new standard for global recognition of management accounting.

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