Valuation Methods

There are three traditional valuation approaches: the income approach, the market approach, and the asset-based approach.

The income approach is based on the economic principle of anticipation wherein the value of the Company is the present value of the economic benefits expected to be generated by the Company in the future. The discounted cash flow method of valuation is based on future operating result projections. The analysis includes review of past financial performance, discussions with management regarding company and industry outlook, and consultation with other outside industry experts. From these sources and others, a projection of operating results is developed and translated into an after tax cash flow. After determining an appropriate discount factor and residual value, the entire cash flow stream is then discounted back to its net present value, thus determining one reliable indication of value.

In many circumstances, the characteristics of the entity being valued will be comparable to other entities in similar situations. After appropriate adjustments for unusual or non-recurring items and through analysis to ensure comparability, various financial ratios from the market comparables can be applied to the subject entity to determine its value. The ratios used in this analysis often include: Price /Earnings, Price/Cash Flow, Price/Revenue, Earnings/Production Unit, and Earnings/Employee. The market approach to valuation is based on the economic principle of substitution which holds that a buyer will not pay more than he would for an equally desirable alternative. Actual market transactions can provide compelling empirical evidence of value.

Asset-based methods start with the "book value" of a company's equity. This is simply the value of all the company's assets, less its debt. Value is established based on the cost of reproducing or replacing the assets, less any depreciation. The true economic value of a company is rarely the same as its book value. However, the market value of underlying assets in a business enterprise may be a significant determinant of value. Investigation and identification of the underlying assets often reveals value in areas which may not appear to contribute directly to earnings or profitability. Our valuation analysis typically encompasses assets such as inventories, machinery and equipment, land and buildings, other current assets, and intangible assets. Where others may often overlook this important area, the underlying assets are a consistent part of our valuation analysis.