Understanding The Income Valuation Approach – A Primer For Judges Who Must Hear Valuation Cases

Overview: In determining the price to pay for a company, a buyer of a business ultimately looks to the return he will receive on his investment. That return might come in the form of annual dividends, growth in the value of the business over time (as eventually realized by a sale at some future point in time), or some combination of the two. The quantification of the value, in today’s dollars, of these expected future sources of return is at the essence of business valuation and the income valuation approach. The income approach focuses on the value of a company’s income streams. Whether derived from historic results or future forecasts, the value of a business is based on the present worth today of an anticipated series of future income streams. Techniques such as the capitalization of earnings and discounted future income methods are powerful tools to value the closely held business. Both methods fundamentally focus on the present worth today of an anticipated future income stream (however defined) to a buyer. Determining which of the two (or both) methods is appropriate in a given situation involves determining the fundamental expected future outlook. In rapidly growing companies, the discounted future income method is often the appropriate technique. Where a company is expected to exhibit stable growth rates in the future, the capitalization of income method is usually more suitable.

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Format: PDF | Size: 255KB | Date: Mar 2001 | Pages: 4