Economic Wheel – Economic Theory – On the Uniqueness of Business Valuation Model [经济之轮 – 经济理论 – 论商业评估模式的唯一性]

1. Current Business Valuation Models

1.1 Definition of Business Valuation

Business Valuation is a kind business
behavior practiced by business valuation professionals to assess the value of
the whole or part of a business according to certain business valuation model
and to determine the price of the business.

1.2 Status and Role of Business Valuation

Business valuation is the foundation of
business as a special commodity to trade and exchange. Business valuation
is a mandatory work for business development, business integration, business
exchange and a business transition. Business valuation is also a means for
business operators and owners to conduct comprehensive self-evaluation on the
performance of the operated business. Business valuation is also a necessary
condition to implement value management on the business.

1.3 Definition of Business Valuation Model ^[3]

Business valuation model should be defined as the set of the contents to be valued, the valuation scope and the valuation methods
applied.

1.4 Definition of Business Valuation Method

Business valuation method should be defined as the
method to calculate the value of
a certain level of the assessed business.

1.5 Relationship
between Business Valuation Model and
Valuation Method

Business valuation model should be unified and
unique; business
valuation methods for different levels of a
business can be different; that
is to say that business valuation model
can contain multiple different valuation methods. The valuation method regarding the same
level of business shall be the same as most as possible. In
case of rationality accepted by
all, the valuation methods for the same level of
businesses can be different; such as the variation of valuation
methods caused by the industry difference; the variation methods caused by
profit growth property, etc. The compatibility of different valuation methods
for the same business level can be developed and improved according to the business valuation framework.

1.6 Current Business Valuation Models and Methods

In speaking of current situation, business
valuation is fulfilled with different business valuation models ^[1].
Current business valuation models mainly are the followings:

1.6.1 Asset(or cost) based approach
method
1.6.2 Market-based approach method
1.6.3 Income-based approach method
1.6.4 Venture capital approach method

2. The Uniqueness of Business Valuation
Model

2.1 Basic Principle of Business
Transaction

The basic principle of business
transaction is that same value goods can be exchanged. Based on this
principle, I think that business valuation model should only be one, which is
the uniqueness of business valuation model.

2.2 Uniqueness of Business Valuation
Model

The uniqueness of business valuation
model means all business valuation shall apply the same business valuation
model. Then we can ensure the comparability of valuation results; we can
ensure the fairness of the business transactions. The valuation results brought
by different valuation models can not be compared.

3.2.1 The Commonality of
Business

3.2.3 The Common Requirements of Business

3.3. Beizhan Model

Based on the external foundation of business valuation model, according to the
internal foundation of business valuation model, establishing the united and
unique business valuation model is possible. Standing on this, I would like to
propose the fact plus growth valuation model, that is the Beizhan Model.

3.3.1 Fact plus Growth Valuation Model

Fact plus growth valuation model consists two parts, the fact part is the valuation on the current resource characteristics and current profit characteristics of a business, the growth part is the valuation on the profit growth characteristics and resource expansion characteristics of a
business.

The valuation of the fact part is relatively easy to understand, and it is
possible to get relatively more objective valuation result. Many current
business valuation models belong to this kind valuation, such as: assets (or
cost) based approach method, income-based approach method, and so on.




The valuation of the
growth part is relatively not easy to understand or acceptable. However, profit
growth and resource expansion are the essence of business, which is not
difficult to understand. Of course, the profit growth characteristics and
resource expansion characteristics of each business are different. There are
three main growth types here, one is parallel
growth; one is curve growth; one
is curve shrink (negative growth).
Curve growth may contain the case of geometric
curve growth. For example: the growth of the discrete business of catering,
retail and other businesses belong to parallel growth type; the growth of chain
store business belongs to curve growth type; and the
growth of some internet
companies at some stages belongs to geometric curve growth type; the growth of some uncompetitive companies at some stages belongs to
curve shrink type.

Some people will
definitely say, the valuation of growth part of a business is difficult to be
determined objectively. It is not in reality. The growth part of a business is
firstly determined by the fact part of the business (Namely current resource
characteristics and profit characteristics). Secondly, the growth part of a
business is determined by the prospect and competition form of the market it
belongs to. These factors can make the valuation of the growth part of a
business to be more objective. Competitive position of the business is also a
factor in its growth in part to assess the impact. The competition position of
a business in the belonged market is a key factor to influence the valuation of
the growth part of that business. The competition position of the business is a
kind resource characteristic of the business.

The valuation of core
value consists of valuation of intangible
assets and tangible assets mainly, such as: brand resources, technology
resources, product type product resources, service type product resources, customer
resources, and so on. Traditional asset or cost valuation method can be applied
to such kind valuation.

3.3.2.1.2 Packaging Value

The valuation of
packaging value contains the valuation of market resources of a business, such
as: market competition position of the business, marketing forms of the
business, products or services, and so on. The valuation of this part needs to
be gradually developed and improved based on business valuation framework.

3.3.2.1.3. Strength Value ^[2]

The valuation of the strength
value ​​contains the
valuation of the operation resources of a business, such as: business partners,
business alliances, business sponsors, business supporters, business documents,
business relationships, and so on. The valuation of this part also needs to be
gradually developed and improved based on business valuation framework.

3.3.2.2. Current Profit Valuation

Current profit valuation
mainly focuses on the current profit of a business. The traditional income
based method can be applied to such kind valuation.

3.3.3. Growth Part Valuation

Growth part valuation can
be divided into two parts: resource
expansion valuation and profit growth valuation. It is a chromatogram of a
business in the cross section on time after a
certain expected developing period. According to current common
practice, the expected developing period generally is five years. In my view, this is expected chromatogram and the
chromatogram of the fact part is somewhat different, especially in the aspect
of resource expansion characteristics.

3.3.3.1. Resource Expansion Valuation

Resource expansion
valuation shall be based on the certainty
of resources, because it is after all a forecast for the future. In my
view, the valuation of resource expansion shall mainly include the intangible asset part in the core value, such as: brand
resources, customer resources, technology resources, and so on. Tangible asset
resources, the expansion of packaging value and strength values ​​are uncertain, under the principle of equality and fairness, they can be out of
consideration. The valuation of this part can also be gradually developed and
improved based on business valuation framework. The traditional intangible
asset valuation method all can be applied to such kind valuation.

3.3.3.2. Profit Growth Valuation

Profit growth valuation
mainly focused on the profit status in the expected developing period of a
business. The traditional method can be used to assess the income of such
assessments.

4. Summary

The
unique of business valuation model is determined by the inherent nature
characteristics of business, the fact plus growth business valuation model (Beizhan Model) I have proposed reflects the inherent
nature of the business, meets the
external needs of
business, and therefore it can be
used as the sole business
valuation model. I also very welcome further discussion on this model from the industry
insiders.