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The income approach is applied in virtually all valuations of closely held businesses. This requires several inputs, including an estimate of future cash flows and the determination of an appropriate rate of return (discount rate). An important element of the discount rate is historical data on the annual returns from the public stock markets over a long period of time. But the public market returns cannot fully capture the unique characteristics of the subject company, so the analysis must exercise informed judgement and add a “company specific’ risk component” to the analysis. The company specific risk is intended to allow […]

The new tax law will have an impact on how privately held businesses are valued, under both the income approach and the market approach. Webinars and articles will be forthcoming in the business valuation literature proposing ways to alter our analytical tools and procedures. After the Gross v Commissioner Tax Court case of 1999, members of our profession rose to the challenge and developed numerous models addressing the tax affecting of pass-through entities; I expect a similar “call to action” this time around. The new tax law has several components that will impact on the value of a privately held […]