Challenges in establishing the value of
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This paper will examine the issue of determining fair value for a small, closely held private company. There are several models that are used to determine such value. The main ones are the net asset approach; the discounted cash flow approach; the earnings multiplier approach and the capitalized earnings approach. Each of these will be analyzed in turn, with respect to the technique, its advantages and its disadvantages. The assumptions of each the basis for the commonly applied valuations and discounts will be taken into account as well. This is critical, because the exercise inherently requires that assumptions are made. The accuracy and usefulness of the outputs is directly related to the accuracy of the inputs. Thus, the exercise revolves around making reasoned and intelligent assumptions. The first assumption that needs to be made is with regards to the efficacy of the different models and approaches
Net Asset Approach
The net asset approach ascribes the value of the business as the difference between its net assets and net liabilities. In other words, the value of the business is the current value of the equity. As with any valuation approach, the first thing that needs to be done
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