Reflecting on business valuation methods: A valuation model based on value creation

Reflecting on business valuation methods: A valuation model based on value creation

Abstract:

Despite the predominance of cash-flow based methods in business valuation, other theoretically sound methods may also be applied to valuation, leading to accurate estimates of firm value. In this article, we first reflect on the key steps to value a business. After briefly reviewing widely used valuation models, we present an accounting-based model that
builds on the idea of value as defined by residual income or abnormal earnings. We provide an example of how this residual income valuation model can be used in practice and briefly review academic evidence highlighting the strengths of this model.

Keywords: Valuation methods, Residual Income, Multiples, Accounting-based valuation.