Valuing Pass-Through Entities

Chapter 7Income Approach and Investment Value

Investment value is defined for real estate transactions as “the specific value of an investment to a particular investor or class of investors based on individual investment requirements; distinguished from market value, which is impersonal and detached.”¹ This definition of investment value also holds true for business ownership interests.

Individual investment requirements may be different depending on the buyer. Keeping with our real estate analogy, different home buyers will have different priorities. Buyer priorities may include economic status of a community, safety/crime issues, access to mass transportation or highway, quality of school system, ethnic mix/diversity, houses of worship, shopping, restaurants, appearance of neighborhood, trends in home values, and other noncontrollable factors. Selecting a particular home in a neighborhood often involves deciding on busy/quiet street, condition of home (tear-down versus fix-up versus move-in condition), curb appeal, home features (number of bedrooms, size of kitchen, property size), and location on the street (corner home, cul-de-sac).

The process of choosing an industry and company to invest in is similar to the process of buying a home. An informed buyer will evaluate non controllable factors, such as expectations of the economic, technological, life cycle, and other risk factors associated with a target industry; general economic conditions; access to labor, transportation, ...