Valuation of Businesses and Intangible Assets
Business enterprise versus equity
Candidates must distinguish enterprise value (whole business, debt-free) from equity value (residual to shareholders). The bridge is: equity value = enterprise value − debt + cash (adjusting for nonoperating assets and liabilities). A DCF built on free cash flow to the firm yields enterprise value; discounting free cash flow to equity yields equity value directly.
Know the standards of value and levels of ownership: a controlling interest commands a control premium; a minority interest may warrant a discount for lack of control and a discount for lack of marketability (DLOM). Apply these sequentially and only once each - a common trap is double-counting.
Intangible assets
Identify and value identifiable intangibles: customer relationships, trademarks, technology, noncompete agreements, and goodwill (the residual). The relief-from-royalty method values an intangible as the present value of royalties avoided by ownership. The multi-period excess earnings method (MPEEM) isolates the cash flow attributable to the primary intangible after contributory asset charges. The with-and-without method compares enterprise value with and without the asset.
Traps: (1) Forgetting contributory asset charges in MPEEM, which overstates the subject asset. (2) Using an inappropriate royalty rate unsupported by market data. (3) Tax-affecting pass-through entities incorrectly. (4) Applying DLOM to a controlling, marketable interest.
Rule of thumb (relief-from-royalty): value ≈ expected revenue × royalty rate × (1 − tax rate) discounted over the asset's remaining life. Example: $5M revenue, 4% royalty, 25% tax, 10% discount rate over 5 years yields roughly $5M × 4% × 0.75 × annuity factor ≈ $570,000.