Method of and system for analyzing, modeling and valuing elements of a business enterprise

Abstract

An automated system (100) and method for analyzing, modeling and valuing elements of a business enterprise on a specified valuation date. The performance of the elements are analyzed using search algorithms and induction algorithms to determine the value drivers associated with each element. The induction algorithms are also used to create composite variables that relate element performance to enterprise revenue, expenses and changes in capital. Predictive models are then used to determine the correlation between the value drivers and the enterprise revenue, expenses and changes in capital. The correlation percentages for each value driver are then multiplied by capitalized value of future revenue, expenses and changes in capital, the resulting numbers for each value driver associated with each element are then added together to calculate a value for each element.

Description

CONTINUATION AND CROSS REFERENCE TO RELATED PATENT[0001]This application is a continuation of application Ser. No. 08 / 999,245 filed Dec. 10, 1997. The subject matter of this application is also related to the subject matter of U.S. Pat. No. 5,615,109 for “Method of and System for Generating Feasible, Profit Maximizing Requisition Sets”, by Jeff S. Eder, the disclosure of which is incorporated herein by reference.BACKGROUND OF THE INVENTION[0002]This invention relates to a method of and system for business valuation, more particularly, to an automated system that analyzes elements of a business to identify their value drivers, models the value creation impact of the elements and computes a valuation of each of the elements on a specified date.[0003]The valuation of a business is a complex and time-consuming undertaking. Business valuations determine the price that a hypothetical buyer would pay for a business under a given set of circumstances. The volume of business valuations being...

AI Technical Summary

Benefits of technology

[0029]As shown in Table 1, the growth opportunities of the firm are valued using option pricing algorithms. Option pricing algorithms are improvements over traditional methods as they correct two inaccurate assumptions implicit in traditional discounted cash flow analyses of business growth opportunities, namely: the assumption that investment decisions are reversible, and the assumption that investment decisions can not be delayed. In reality, a firm with a project that requires an investment has the right but not the obligation to buy an asset at some future time of its choosing. However, once the investment is made it is often irreversible—a situation analogous to a call option. Because option valuation algorithms explicitly recognize that investments of this type are often irreversible and that they can be delayed, the asset values calculated using these algorithms are more accurate than valuations created using more traditional approaches. The use of option pricing analysis for valuing growth opportunities (hereinafte

Problems solved by technology

The valuation of a business is a complex and time-consuming undertaking.

Market valuations are also used in some cases but their use is restricted because of the difficulty inherent in trying to compare two different companies.

This method is difficult to use properly because no two companies are exactly the same and no two transactions are completed for the exact same reasons.

There are several difficulties inherent in this approach.

First, the reliance on informed guessing places a heavy reliance on the knowledge and experience of the appraiser.

The recent increase in the need for business valuations has strained the capacity of existing appraisal organizations.

The situation is even worse for many segments of the American economy where experienced appraisers don't exist because the industries are too new.

Another drawback of the current procedures for completing a valuation is that the appraiser is typically retained and paid by a party to a proposed transaction.

It is difficult in this situation to be certain that the valuation opinion is unbiased and fair.

Given the appraiser's wide latitude for selecting the method, the large variability of experience levels in the industry and the high likelihood of appraiser bias, it is not surprising that it is generally very difficult to compare the valuations of two different appraisers—even for the same business.

These limitations in turn serve to seriously diminish the usefulness of business valuations to business managers, business owners and financial institutions.

The usefulness of business valuations to business owners and managers is limited for another reason—valuations typically determine only the value of the business as a whole.

Another limitation of the current methodology is that financial statements and accounting records have traditionally provided the basis for most business valuations.

Unfortunately, these accounting statements have proved to be increasingly inadequate for use in evaluating the financial performance of modern companies.

Many have noted that traditional accounting systems are driving information-age managers to make the wrong decisions and the wrong investments.

If they had been forced to

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