Equity Valuation There are a variety of reasons

There are a variety of reasons that owners of closely held businesses such as Suburban Electronics Company (Suburban) may want to determine the value of their business. For instance, it may be to establish a reasonable price for a transaction involving the sale of some or all of the company's stock. Fair market value must be determined taking into consideration all relevant facts and circumstances. In the case of an operating company viewed as a going-concern, fair market value takes into consideration not merely the value of the physical assets of the company, but goodwill and other intangible assets as well.

The value of a business as a going-concern must consider its ability to generate revenue, earnings, and cash flow. Valuing a business as a going-concern also assumes that there is no current intention to liquidate the company or sell the underlying assets, but that it will continue to operate as a business. Doing so also requires an understanding of the industry in which the company operates, and the risk that the company or the industry will experience a downturn. Valuation requires an evaluation of all known risks, as well as market volatility and other potential risks such as contingent liabilities.

The first problem that one must address when considering Suburban is why management is interested in taking the company public. The stated reason is to raise additional capital to help the company to continue to grow. However, the information pr

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ation should also consider evidence of fair market value. For example, a recent offer by a company dealing at arms length to buy Suburban would be a reasonable benchmark for valuing the company. A decision to sell a certain percent of the company to an interested third party in a private stock sale would be another way to value Suburban based on direct market evidence of its value. Another valuation method can broadly be described as a formula based approach. This is a so-called rule of thumb approach to stock valuation. This appears to be the method favored by Tracy. A formula may take many forms, such as a multiple of book value or a multiple of revenues. The advantage of using a formula approach to valuing a privately held company is that the process is fast, simple and inexpensive. The disadvantage of the formula method is that it may not accurately determine the fair market value of the company under consideration because formulas cannot value intangibles. For example, if Suburban has a reputation with its customers for quality and on time delivery, this is not easily represented in a formula approach to valuation. Similarly, if Suburban were about ready to sign a multi-year contract with a financially sound custo

Category: Economics - E