Page 40 - Bankruptcy and Reorganization Services

Chapter 9

Valuation Approaches and Methods

The three generally accepted approaches to determine the value of a business are

1. the market approach,

2. the income approach, and

3. the asset-based (cost) approach. fn 1

In a typical bankruptcy engagement, each of these three generally accepted approaches is considered
whenever a going concern premise has been adopted for the valuation of a business or business interest.
Even when the premise is liquidation value, more than one of these methods may still apply, especially
when valuing individual assets or groups of assets. Practitioners should document their considerations of
each approach so readers of the valuation report will more fully understand how any conclusions were
reached (for a more in-depth discussion of this see chapter 10, "Valuation Synthesis and Conclusions,"
of this practice aid).

Market Approach

The market approach determines value by analyzing the trading price of stock for similar public compa-
nies, as well as completed public or private transactions for similar companies, and applying value
measures (typically multiples) derived from the comparative companies or transactions to the subject
company. This approach utilizes real-world transactions in the marketplace to derive a value or range of
values for the subject interest or assets. This approach requires a thorough search for guideline compa-
nies and transactions and a detailed analysis and often adjustment of the selected data.

The market approach can be used to estimate the value of equity directly or to estimate the value of in-
vested capital. As discussed later, practitioners can generally choose whether to use equity-based multi-
ples or invested-capital-based multiples to derive the appropriate value. If the market approach is used to
determine the invested capital of the business, the equity value can then be estimated by subtracting the
value of interest-bearing debt. Note that the premise of value used to value the interest-bearing debt will
depend on the purpose of the valuation. This is discussed in more detail in the "Asset (Asset-Based) Ap-
proach" section.

Applying the market approach when the subject company is in distress may require substantial adjust-
ments to the company’s results and to the guideline company multiples. Practitioners should be aware
that, if substantial adjustments are required, practitioners may need to consider lowering the reliance
placed on this approach or use another approach.

fn 1 Paragraph .31 of VS section 100.

All VS sections can be found in AICPA Professional Studies.

38 © 2020 Association of International Certified Professional Accountants