What to Value in Business Valuations? (Бизнес как объект оценки)

Abstract

This Paper perceives the immediate object of business valuation as lying on the side of active business operations rather than lost among nuances of the trading activities of the interlinked public capital market. By a number of illustrations it is made apparent that private illiquid business interests are not represented on the public market so the pricing principles of the modern portfolio theory are not applicable to such interests. Consequently, this paper brings into focus the differences attendant upon the valuation of public vs. private business interests. It is claimed that the shift in focus from private to public businesses brings into existence the universe of financial titles whose pricing principles have already been well-studied in the financial economics, however, such wrap-all mainstay concepts related to public businesses as the M&M's 'firm value' , WACC, 'value of invested capital' 'market discount rates' reified under competitive market equilibrium have no convincing correspondents in the area of illiquid private businesses where the market is sparse, if at all observable, and where pricing aspects of the transactions are more reliant on the assessment, and reconciliation, of individual's investment worth under the transaction based view (developed in our former papers) rather than the subjunctive-style estimation of singular fundamental exchange value under the conventional efficient markets view. It is noticed that valuation of private businesses has significant affinities with the assessment of investment projects' efficiency and, indeed, often represents nothing but 'tail scenarios' of investment projects subsequent to having the business 'hardware' in place. Taking a leaf from the investment projects assessor's outlook is urged in valuing private businesses and imitation of the public stock analysts' EMH-based toolset is thrown into question. In particular, it is argued that the Highest and best use analysis is a must for private business valuation in line with property valuations as it uncovers a true but dormant economic potential of business activity in the area which can't be stabilized by the effects of equimarginal rule operative on public markets. Further, it is argued that the discount rate concepts for the field should be based on the real theories of interest rates instead of the financial theories.On the practical plane of the business valuation profession, it is advocated that the world's professional valuation standards should dichotomize the treatment of business valuation and develop separate guidance for the area of private businesses. Likewise, a plea is made, with some hints given, to explain what is business as a decision-making entity, as the neoclassical theory of valuation - absent the concept of perfect markets - is badly attuned to de-humanized decision-makers (what is worth (utility) to a business?, etc.).