How are Companies Valued for ESOP Transactions?

Income Approach Market Approach Asset Approach
  • Discounted cash flow method
  • Capitalized cash flow method
  • Prior transactions in company stock
  • Guideline public company method
  • Guideline transaction method
  • Net asset value method
  • Liquidation analysis
Overview of Approach Overview of Approach Overview of Approach
The earnings-based approach is appropriate where the business being valued is earning a fair return on its capital employed and the hypothetical purchaser wishes to acquire the future indicated earnings generated by the enterprise. Based on prices determined by the financial market. 

Estimates the value of the business based upon evidence of prices investors are willing to pay for companies in similar lines of businesses. 

Used as a valuation methodology when liquidation is contemplated because the business is not viable as an ongoing operation.

Asset values constitute the prime determinant of business worth (inventory, receivables, property and equipment, etc.) as opposed to cash flows generated by such assets.

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