Business Valuation (BV)
What the BV candidate must know
The three approaches are the backbone: income (capitalization of earnings, discounted cash flow), market (guideline public companies, guideline transactions, prior transactions), and asset-based (adjusted net asset method, liquidation). Know when each is most reliable - income for stable going concerns, market when good comparables exist, asset-based for holding companies or when earnings don't reflect value.
Core mechanics
For the income approach, distinguish capitalization rate from discount rate: cap rate = discount rate minus expected long-term growth (Gordon growth). Know how to build a discount rate with CAPM and a build-up method (risk-free rate plus equity risk premium plus size and company-specific premiums). Understand normalizing adjustments (owner compensation, nonrecurring items, related-party rents), the levels of value (control vs. minority, marketable vs. nonmarketable), and the discounts/premiums that bridge them (DLOM, DLOC, control premium).
Traps in questions
- Applying a control premium and a minority discount to the same base (double counting).
- Using a discount rate as a cap rate without adjusting for growth.
- Forgetting that SDE (seller's discretionary earnings) is pre-debt-service and used for small businesses; EBITDA is used for larger entities.
- Treating book value as fair market value.
Worked rule of thumb
If discount rate = 18% and sustainable growth = 3%, cap rate = 15%. Value = normalized earnings ÷ cap rate. Apply discounts sequentially (multiplicatively), not by adding percentages.