NJ Business Valuations Accountant Explains Intrinsic Valuation Method

Video Transcript 

My name's Robert Bonavito, New Jersey Forensic Accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions, based on different facts and circumstances.

My name's Robert Bonavito, New Jersey Forensic Accountant, and today I'm gonna talk about the intrinsic valuation method we use when we value a company. We go to court quite a bit. This method is, I think, the best method for valuing most companies.

You know, basically, all you're doing is valuing the cash flow. And here I have $100 of Kennedy half-dollars. There's two hundred in here. And if I was to say, "What would you pay me for this bag of money?", I'm hoping you would say $100 because that's the intrinsic value of these half-dollars. You know, if I take them out, I'll show you, so you can believe me. Okay. It's full of 50...you know, half-dollars. That's how you think of intrinsic value.

Okay, what is it really worth? What is it worth? It's worth the cash flow of the business, and in this case, your cash flow is gonna be $100. It's worth $100. Now, this method has been around forever, and this is how, if you go back and you can read, you know, the Egyptian hieroglyphs, I mean, that's gonna basically...they have records, and people are keeping records, and you're valuing the companies based on, you know, how many bushels of wheat they sold and what the cash flow is.

So the intrinsic valuation method basically comes down to two methods. One is the discounted cash flow, and one is the capitalization. They can both be related, but I'm not gonna go into that in this video. But the discounted cash flow is usually when you project cash flow into the future and discount it back. The capitalization rate is where you take an average of cash flow and divide it by a capitalization rate. They're both really the same, but when you look at a valuation and they're using the intrinsic method, which is appropriate to 90% of the companies out there, that's what they're gonna be doing.

If you have any questions about this video, feel free to email me.