Calculator Glossary Calculation Methodologies Support
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Methodologies


Book Value: Book value represents the fair market value of the assets minus liabilities. This method is suitable when goodwill is limited or may disappear quickly. This method does not take into account the earnings capacity of the business.



Discounted Earnings: Projected future earnings are forecasted and then discounted using a rate which reflects the expected rate of return from another investment opportunity with a comparable level of risk. The sum of the discounted future earnings is the current valuation.

This is the most common form of business valuation. The discounted cash flow technique is most often used for valuing service oriented businesses (whose asset bases are often small) and for companies experiencing high growth rates.



Capitalization of Earnings: This method calculates the amount of capital that would have to be invested at a specified rate to yield the current average net annual earnings of the business. Unlike the discounted earnings method, capitalization considers historical earnings rather than forecasted earnings. This method does not take into account the book value of the business and is generally suitable for service oriented business within limited capital.



Capitalization of Earnings + Book Value: This method goes a step further than the capitalization of earnings method by attributing some of the earnings to the business’s assets (book value) and the remaining earnings are capitalized at a rate consistent with the risk associated with the business. The capitalized earnings are then added to the book value.

This method might be used when capital is important to income production.


This calculator is meant to provide a valuable starting point in helping you determine the value of your client’s business. This valuation, however, is not a substitute for a formal valuation nor does it establish a value for tax or underwriting purposes. A formal valuation should be obtained with the guidance of your client’s legal and/or tax advisors. The results from the various valuation methods used in this calculator are based primarily on information provided by the user. However, assumptions have been made regarding discount rate, capitalization rate, long-term growth of earnings, and rate of return on capital assets. These assumptions do not take into consideration business industry risk or company risk specific to a certain business. Any variance in the information provided by the user or assumptions made could change these results. Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors.

This material does not constitute tax, legal or accounting advice and neither John Hancock nor any of its agents, employees or registered representatives are in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of the transactions or topics it addresses. Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors.

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