Business Valuation
Business Valuation is the central domain of the CBV MQE. It tests whether you can choose a defensible premise of value, build a valuation that holds together internally, and explain the result the way a professional would rather than the way a spreadsheet does. Questions cluster around the three approaches, rate construction, earnings normalization, and discounts and premiums.
Premise, standard of value, and the equity bridge
Every valuation fixes three things before any number is produced: the valuation date, the standard of value, and the premise. The CBV Institute defines fair market value as the highest price, expressed in money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party under compulsion to transact. The usual premise is going concern; liquidation is used where continuation is not supportable. Enterprise value and equity value are not interchangeable - bridge between them with interest-bearing debt, excess cash, and non-operating assets.
The three approaches
- Income: discount or capitalize expected economic benefits. Capitalization is a single-period shortcut valid only where growth is stable; capitalization rate = discount rate − long-term growth.
- Market: apply multiples from guideline public companies or comparable transactions, then adjust for size, growth, margin, and risk differences.
- Asset: adjusted net asset value. Usually a floor for an operating business, but the primary approach for holding companies, resource properties, and pre-revenue entities.
Worked example
Normalized EBITDA is $1,500,000; depreciation $200,000; sustaining capital expenditure $250,000; tax rate 25%; after-tax discount rate 13%; long-term growth 3%.
EBIT = 1,500,000 − 200,000 = 1,300,000. Tax at 25% = 325,000, so NOPAT = 975,000. Add back depreciation (200,000) and deduct sustaining capex (250,000) to get after-tax cash flow of $925,000. Capitalization rate = 13% − 3% = 10%. Indicated enterprise value = 925,000 ÷ 0.10 = $9,250,000. Equity value would then require subtracting interest-bearing debt and adding excess cash.
Traps that cost marks
- Using the discount rate directly as a capitalization rate while also assuming growth, double counting that growth.
- Capitalizing EBITDA rather than cash flow, ignoring capex and working capital investment.
- Applying a minority discount to a controlling interest, or a control premium where the subject interest is already controlling.
- Mixing pre-tax cash flows with after-tax rates, or nominal cash flows with real rates.
- Deducting debt twice when bridging from enterprise to equity value.
- Accepting management's normalized earnings without testing for related-party rents, owner compensation, or one-time items.