Three Main Methods Used to Determine Company's Value

Video Transcript 

My name is Robert A. Bonevito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter I would take a different approach have different conclusions, based on different facts and circumstances.

My name is Robert Bonevito, New Jersey forensic accountant. A lot of our core testimony revolves around valuations and appraisals and in my company we use three main sources to do our valuations. The first one is intrinsic value and the second one is relative value and the third one is contingent claims value. And all three methods we apply to pretty much every job we get retained to do. Sometimes some fit and sometimes they don't. Let me talk just talk about intrinsic value. Intrinsic value is basically cash flow, you know, if I... this is let's say $100,000 dollars here, so its worth $100,000 dollars, that's the company's worth, that's what you're gonna pay for it. That's intrinsic value. What is the company worth, you know, what is it worth? It's worth 100 million you're gonna pay 100 million for it, thats intrinsic value. Its what is the company is worth.

The next one is relative value and this is really based on comparing companies to other companies, kind of like a market approach, you know. If you have a pizza parlour and selling and pizza parlors sell at two times their sales, well your pizza parlor probably is worth two times sales. We try and find PE ratios and compare to other companies and try to draw conclusions as to value.

The third one is contingent claims. And what that is it's really for resource type companies like gold mines, diamond mines and oil wells and stuff like that, where we treat it as an option. For example if you have, you know, if it takes you ten dollars to pump out a barrel of oil, well then the option price is ten dollars. So if a barrel of oil is selling for 50 dollars then you have a strike price its above your price of 10 dollars you have a 40 dollar profit. And we just figure out how much oil you have in the ground and then multiply it, you know, by the 40 dollar profit. But it's basically like I say, it's like an option to buy, that's how we treat it. I mean we do have companies that have a lot of resources, we use that method. But the other thing is that when you look at the evaluation people say "okay we have these three approaches that we use, and how do you use them, how do you decide which one to use. Like I said we do use all three but you know, evaluation is really not like an art or a science, it's more like a craft. It's like getting a plumber or, you know, a cook, or electricity. The more you do it the better you get at it. So we see a company, we've done so many, we've probably done hundreds of that company, we go in, were still use all three methods and we have ways of analysing the, you know, the company, and doing the number crunching, and looking at the story behind it, the narrative behind it, we have all kinds of things that we've done for 30 years that we use for every evaluation. So, you know, it's really a craft. And the more you do it the better you get at it. But I believe it's important to utilize all three of these methods and see which one is the best fit and that's the value you can come up with at the end. My name is Robert Bonevito if you have any questions feel free to email me.