Back when I was getting my MBA, I also took a law school course on distressed companies, bankruptcy, and reorganizations. In the text book we used, there was a great parable about valuation titled “The Old Man and the Tree” which I found to be a great illustration of some of the approaches to valuation.
Here’s a link to the parable: The Old Man and The Tree
I think that one of the takeaways is that there are a variety of ways of looking at value. Some are far more simplistic than others, and not every valuation technique is appropriate for every type of business. Still, as a business broker I see some strange price and value rationalizations. While many business sellers, buyers, CPAs, and business brokers like using a rule-of-thumb multiplier or market comparable approach for its ease and simplicity, I believe that often this is not a very accurate approach to business value. So, instead Codiligent tends to focus far more heavily on a capitalized earnings approach or discounted cash flow approach in estimating value.
