Review of Monte Carlo article for BVR

“Price is what you pay, value is what you get.”  This quote from Warren Buffet, which he attributes to his mentor, Benjamin Graham, highlights the fact that the sales price of a business can be a quantifiable number, but the value accruing to the buyer is less tangible.  The future is uncertain, so business appraisers make reasonable assumptions and typically arrive at a single value for a business.  In the article titled “Using Monte Carlo Simulation as a Supplement to the Single Period Capitalization Method” Scott DeMarco, Partner and business appraiser at BST LLP, proposes a new valuation model in the widely recognized business valuation publication, Business Valuation Update.  The new model provides to business owners and other key stakeholders in a valuation with information to assess possible realized values.  As a hypothetical example, this model can provide to the business owner the following information related to the valuation of his or her business:  “The expected value of the business is $3.1 million, and there is a 61% probability that the realized value of the business will be between $3 million and $3.275 million.”  This information provides to the business owner (or acquirer) a risk assessment.  In contrast to that example, a business with an expected value of $3.1 million and a 61% probability that the realized value will be between $1 million and $5 million is riskier.

 

To read the full article, click on the PDF below.

BVU_1405_MonteCarlo

 


Posted on May 27, 2014 at 8:33 PM