Analyzing the relevance of capitalization parameters in the income approach for business valuation

Abstract

Subject. The article addresses capitalization parameters (income, financial result, cash flow) in the income approach to valuation. Objectives. The purpose is to develop methodological approaches to verification and confirmation of relevance of parameters in the income-based approach to business valuation. Methods. The study rests on general scientific and special methods of cognition, including the structuring, comparison, modeling (matrix models to analyze the distribution and redistribution of cash flows), formalization, methodology for generation and analysis of cash flow statements under indirect method, techniques and methods of financial analysis. Results. Confirmation of capitalization parameters in the income approach to business valuation model assumes two prerequisites being met simultaneously, i.e. securing the owner’s income from business ownership and retaining specified business performance indicators. Capitalization parameters for compliance with these two criteria were verified, using the matrix models for financial resources distribution. This enabled monetary security of profit, which, under the prevailing financial proportions, is not invested in either current or investment activities, and can be distributed among owners without affecting further business development and without attracting external borrowings. Conclusions. The permissible multivariance of capitalization parameters in the income approach to business valuation forms a significant range of possible estimates and the uncertainty of final result. Increased accuracy is achieved through the procedure for verification of initial parameters for synchronous compliance with requirements, namely, securing the owner’s income from business ownership and retaining specified business performance indicators.