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| VALUATION PRINCIPLES Economic valuation is based on fundamental principles, or cornerstones: THE PRINCIPLE OF ALTERNATIVES: “In any contemplated transaction, each party has alternatives to completing the transaction”. For example, the owner of a business has choices; to sell or not to sell. The buyer also has choices; to buy; not buy; buy something else; start another business. THE PRINCIPLE OF SUBSTITUTION: “The value of a thing tends to be determined by the cost of acquiring an equally desirable substitute”. Assume that a buyer desires to purchase a business where he can apply his skills. He finds two prospective businesses with similar revenues and profits, and equal future prospects. However, one is priced considerably higher than the other. Under the principle of substitution, the buyer can be expected to purchase the business that is lower priced. THE PRINCIPLE OF FUTURE BENEFITS: “Economic value reflects anticipated future benefits”. Buyers rarely purchase a business without the expectation that the business will perform better under their new ownership than under the seller’s ownership. Often times in valuing a business or professional practice, more than one principle will be at work at the same time.
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BizVal - Reno
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