BUSINESS VALUATION

The value of a companys business enterprise is critical and necessary information for
management. For public companies, an accurate business valuation is necessary for compliance
with numerous Accounting Standards Codifications (ASCs), including ASC 350 Intangibles
Goodwill and Other. For private companies, knowing the business enterprise value is a
necessary step when dealing with gift and estate taxes, stock compensation, for possible sale of
the company or equity interests in it, and for capital structuring. Below is a brief mathematical
derivation of business valuation, and the three approaches and associated methods we use to
calculate it and provide business valuation services.
We define the value of a business enterprise as the value of its net working capital plus the value
of its fixed and intangible assets. This equates to the value of the total capital of the business
(debt plus equity). We derive this relationship from the familiar accounting equation:
Assets = Liabilities + Stockholders Equity
or, more specifically
CA + TFA + IA = CL + LTD + SE
where:
CA = Current Assets
TFA = Tangible Fixed Assets
IA = Intangible Assets
CL = Current Liabilities
LTD = Long-term Debt (defined as all interest-bearing debt)
SE = Stockholders Equity
Rearranging the above equation, we have:
(CA CL) + TFA + IA = LTD + SE
We define the quantity (CA CL) as net working capital (NWC), and as previously defined, the
business enterprise value equals net working capital plus fixed and intangible assets, so that:
Business Enterprise Value = NWC + TFA + IA = LTD + SE
Thus the business enterprise value equals the value of the companys debt plus its equity.

Business Valuation Methods

There are three principal approaches for determining the business enterprise valuation of a
company: the income, market, and cost approaches.
Income-Based Business Valuation Method
The income approach uses business valuation techniques to convert future benefits to a single,
discounted amount. The measurement is based on the value indicated by current market
expectations about those future amounts. Valuation techniques include single and multi-period
capitalization of cash flow models, option-pricing models such as the Black-Scholes-Merton
formula, and binomial (lattice) models.
Market-Based Business Valuation Method
The market approach uses prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. Using this method, we rely upon stock
prices of public companies similar to the subject company, and transaction prices of similar
companies. We typically develop a relationship between the market value of the guideline
companies to its revenue and earnings. Then we use these relationships, commonly referred to as
valuation multiples, to value the business or organization. We multiply the subject companys
revenue or earnings income by the valuation multiples to obtain an indication of the business
enterprise value.
Cost-Based Business Valuation Method
The cost approach is based on the principle of substitution, and postulates that a prudent buyer
would pay no more for an asset than the cost to replace the service capacity of that asset. In
accordance with generally accepted accounting principles, assets are generally recorded at
historical cost less accumulated depreciation. Intangible assets may or may not be included on
historical balance sheets. Liabilities are reflected at face value, while contingent liabilities are
generally not shown. Due to this accounting treatment, the use of book value of the assets and
liabilities to estimate the fair market value of the equity may result in a material misstatement of
fair market value. The cost approach is most useful when applied to the business valuation of real
estate companies, holding companies, heavy manufacturing, and companies for which
liquidation is a likely prospect.
Business Valuation Experts
Appraisal Economics has significant experience offering business valuation services to
enterprises, from Fortune 500 companies to smaller privately held family businesses. We can
value the company in its entirety (debt and equity), value the equity, debt, and options,
separately, and value underlying assets, such as real estate, machinery and equipment, and
intangibles. Whether its for gift and estate tax planning, compliance with Accounting Standards
Codifications, or for an anticipated sale, and regardless of the intended audience (Internal
Revenue Service, Securities & Exchange Commission, potential buyers, shareholders) Appraisal

Economics has the personnel, expertise, and research resources required to provide the
comprehensive business valuations necessary.

REAL ESTATE ADVISORY SERVICES

Appraisal Economics provides a broad range of real estate appraisal and advisory services that
are distinct from traditional real estate appraisal companies.
Appraisal Management
If youre an organization, such as a pension fund with real estate holdings that are geographically
diverse, and require annual real estate appraisals where the appraiser must be rotated
periodically, we understand the amount of time and effort that goes into selecting, coordinating
and rotating the appraisers. Rather than burden your staff with such tasks, let Appraisal
Economics assist you in this process. Our real estate appraisal professionals have first-hand
experience with a large network of qualified real estate appraisers throughout the United States.
Appraisal Review
As part of your financial reporting, does your organization, in addition to periodic appraisals,
require third party review of these appraisals? If so, Appraisal Economics can perform these
services for you. Our appraisal reviews and advisory services can be custom tailored to
specifically meet your needs. For example, in addition to assuring USPAP and FIRREA
compliance, we can also review and comment on specific assumptions made in the appraisal by
bench-marking to industry averages and comparing the assumptions to those made by market
participants. We can also check the accuracy of financial models, specifically relating to current
rents, future rent escalations, and tenant expense reimbursements. Not only do our appraisal
review services provide assurance with respect to USPAP and FIRREA compliance, they also
provide management with a precise summary of any items that we find which may impact
market value.
Due Diligence
We all know that real estate acquisitions are complex transactions. Appraisal Economics can
assist your organization in many aspects of this process. For example, we can provide market
studies specific to your needs. We can also provide site inspection services and deliver our
findings in customized reports. Perhaps the acquisition contains a number of complex leases,
Appraisal Economics can create lease abstracts that summarize all of the major financial and
legal terms of the lease for easier analysis.
Financial Modeling
It is not uncommon for an organization, whether through mergers or rapid growth, to be
burdened with inconsistent real estate financial models. Appraisal Economics understands how

time consuming it can be to standardize financial models for use in reporting and property
management. Rather than burden your staff with such tasks, we can assist your organization in
standardizing your financial models to best meet your needs.
Market and Feasibility Studies
True market and feasibility studies are complex undertakings and require a significant amount of
research and analysis of real estate, demographic, and socioeconomic data. The skills necessary
to perform these studies are a blend of real estate and economic expertise. Appraisal Economics
has the talent to perform such studies in a highly proficient and expert manner.
A market study typically involves an evaluation of factors that influence the supply and demand
for real estate in a particular market. This analysis is often paired with a marketability study,
which evaluates these factors as they relate to the development potential of a specific site or
building. The outcome of a marketability study is the identification of the potential market and
investment risks. Both of these studies culminate in a feasibility study, which determines whether
the expected returns on a particular project are sufficient to justify the market risk.
The most frequent users of these services include: developers, equity participants, lenders,
government and quasi government organizations. The purpose of such studies include strategic
planning and due diligence, property acquisition, asset sale, new and redevelopment projects,
work outs of distressed properties, portfolio management, project financing, and deal
structuring.
If your organization requires these services or is in need of assistance in performing such tasks,
Appraisal Economics can help. Contact us today for more information on our real estate
appraisal and advisory services.
REAL ESTATE APPRAISAL

Appraisal Economics is capable of providing traditional real estate appraisal services throughout
the United States. We are accustomed to working in large and small markets across the country.
Our approach to real estate appraisals is always the same: know the local market. When
preparing a real estate appraisal, we deal with local property owners and managers, sales and
leasing brokers, government officials, and other appraisers. These discussions are part of every
assignment, and when completed, provide us with a clear understanding of the history of the
local market as well as the markets perception of the future.
Our real estate appraisals are used for a variety of purposes, including purchase price allocation
relating to ASC 805 and 350 (formerly FASB 141 and 142), bankruptcy proceedings, gift and
estate tax planning, litigation support, and mortgage lending. Of particular interest to
organizations requiring real estate appraisals for purchase price allocation, Appraisal Economics
can also provide intangible assets analyses and machinery/equipment appraisals that are required
for the allocation.

It is not uncommon for real estate appraisers to determine market value in the course of
performing the appraisal. In the case of special purpose industrial properties, or properties
located in rural or depressed markets, market value may be very low; however, the value inuse, which specifically relates to the operator, may be much greater. We have the experience
and expertise to identify such issues and address them at the start of the engagement.
Clients requiring real estate appraisals of multiple properties in diverse geographic areas are
faced with the challenge of engaging many appraisers to accomplish this task. Inconsistencies in
terms of valuation methodology are bound to occur when working with many different firms.
Appraisal Economics is frequently engaged to perform such multiple property engagements. Our
staff is capable of coordinating these types of undertakings and delivering to the client a product
that is consistent, timely, and easily understood.