Home  Journals  Financial Analytics: Science and Experience  1(355) - 2021 January-March

Modern techniques for the comparative method of business valuation

Received: 12 October 2020

Received in revised form: 28 October 2020

Accepted: 16 November 2020

Available online: 26 February 2021

Subject Heading: ASSESSMENT AND APPRAISAL ACTIVITIES

JEL Classification: G32

Pages: 44–64

https://doi.org/10.24891/fa.14.1.44

Subject. The article investigates the modern implementation of the comparative approach to appraising the business value via new technologies and software applications.
Objectives. Analyzing key issues of the comparative approach theory, I demonstrate capabilities of modern IT systems in terms of valuation. The study presents what may be used to overcome the imperfection of the classical framework for the comparative valuation, unveil the substance of new techniques for applying ordinary methods of the comparative valuation.
Methods. The article is based on key classical elements of the comparative approach theory via new software and IT environments. I also present principles of the comparative approach theory, its logical sequence and argumentation. The article shows the nexus with new technological components of modern IT systems.
Results. I reveal the substance of key modern methods to implement the comparative approach theory in the time of the digital economy and Big Data. The article scrutinizes the main elements of the comparative approach theory in terms of their contemporary interpretation and use in the post-COVID-19 economy. I showcase methods to use comparative approach methods in modern IT and analytical systems.
Conclusions and Relevance. As the use of IT systems shows, raw data are now more easily collected and processed, which is needed for valuation purposes, when they are handled by financial analysts and financial statements are normalized. The findings are applied by today's appraisers, valuation and fundamental analysts. The use of modern valuation methods supplements and amplifies the classical valuation framework and enhances the quality of valuation.

Keywords: comparative method, precedent transaction method, equity capital market, comparable company analysis, multipliers

References:

1. Gray R.P., Kester R.B., Minor B.H. Working Capital Considerations for Business Valuations. Financial and Valuation Litigation Expert, 2017, iss. 68, pp. 16–19. URL: Link_ Considerations.pdf
2. Bingham B.B. Valuation Professionals: Be Aware of New Rules; Speak Your Mind. Financial Valuation and Litigation Expert, 2013, iss. 45, pp. 21–22. URL: Link_ Properties.pdf
3. Hitchner J. ‘LinkedOut’. A Response to a Business Valuation Standards Discussion. Financial Valuation and Litigation Expert, 2013, iss. 40, pp. 1–6. URL: Link
4. Burkert R.P., Dohmeyer B. Mean Reversion Model to Adjust Excess Compensation. Financial Valuation and Litigation Expert, 2013, iss. 40, pp. 9–12. URL: Link
5. Chaffee D.B.H. Option Pricing as a Proxy for Discount for Lack of Marketability in Private Company Valuations. Business Valuation Review, 1993, vol. 12, iss. 4, pp. 182–188.
6. Longstaff F.A. How Much Can Marketability Affect Security Values? The Journal of Finance, 1995, vol. 50, iss. 5, pp. 1767–1774. URL: Link
7. Ji-Fan Ren S., Wamba S.F., Akter Sh. et al. Modelling Quality Dynamics, Business Value and Firm Performance in a Big Data Analytics Environment. International Journal of Production Research, 2017, vol. 55, iss. 17, pp. 5011–5026. URL: Link
8. Greene D. Valuations in Corporate Takeovers and Financial Constraints on Private Targets. Journal of Financial & Quantitative Analysis, 2017, vol. 52, iss. 4, pp. 1343–1373. URL: Link
9. Reilly R.F. DLOM in Valuation of Closely Held Company Securities in Family Law. American Journal of Family Law, 2017, vol. 31, iss. 1, pp. 34–50.
10. Reilly R.F. The Asset-Based Approach to Business Valuation in Family Law (Part I of III). American Journal of Family Law, 2017, vol. 31, iss. 2, pp. 69–80.
11. Kung-Cheng Ho, Shih-Cheng Lee, Chien-Ting Lin et al. A Comparative Analysis of Accounting Based Valuation Models. Journal of Accounting, Auditing & Finance, 2017, vol. 32, iss. 4, pp. 561–575. URL: Link
12. Ali A., Hwang L.-S., Trombley M.A. Residual-Income-Based Valuation Predicts Future Stock Returns: Evidence on Mispricing vs. Risk Explanations. The Accounting Review, 2003, vol. 78, no. 2, pp. 377–396. URL: Link
13. Jinhan P., Sung-Soo Y. Determinants of Analystsʼ Cash Flow Forecast Accuracy. Journal of Accounting, Auditing & Finance, 2012, vol. 27, iss. 1, pp. 123–144. URL: Link
14. McIntosh W. Forecasting Cash Flows: Evidence from the Financial Literature. The Appraisal Journal, 1990, vol. 58, pp. 221–229.
15. Lorek K.S., Willinger G.L. Multi-Step-Ahead Quarterly Cash-Flow Prediction Models. Accounting Horizons, 2011, vol. 25, iss. 1, pp. 71–86.
16. Francis J.M. Deriving IRR Sets from Market Transactions. The Appraisal Journal, 1995, vol. 63, iss. 2. URL: Link
17. Hamilton C. Is It the Market Approach or the Income Approach? Financial Valuation and Litigation Expert, 2011, iss. 33, p. 15. URL: Link Issue_33_Hamilton.pdf
18. Bogatyrev S.Yu. Testing Behavioral Asset Pricing Models on Russian Financial Market. International Journal of Trade, Economics and Finance, 2014, vol. 5, iss. 1, pp. 48–51. URL: Link
19. Hitchner J. How to 'Rig' a Valuation: The Discount Rate. Financial Valuation and Litigation Expert, 2013, iss. 41, pp. 1–6.

View all articles of issue

ISSN 2311-8768 (Online)
ISSN 2073-4484 (Print)

Journal current issue

Vol. 17, Iss. 1 March 2024

Archive