Accounting book value seldom, if ever, reflects the market value of a business because most businesses sell based upon their earnings or cash flow.  Asset value, or more appropriately, net asset value, may provide a lower limit on value for holding companies or in cases where earnings are low. 

Excess earnings, or earnings above those required on the investment in working capital and fixed assets, give rise to goodwill or intangible value. The difference between accounting book value and market value is best illustrated in the diagram below.

The value of owner's equity can be estimated through various methodologies including: discounted cash flow, comparable company, comparable transaction and adjusted net worth.  The use of a market multiple based upon transactions of comparable companies can be used to estimate the value of a business.

Value can be estimated by applying the market multiple to the subject company's earnings before interest, taxes, depreciation and amortization charges.  Establishing a recurring earning estimate (EBITDA) is the key to arrive at a meaningful value estimate.

The recurring earnings base may require an adjustment to officer/owner compensation and removal of all one time or extraordinary expenses. In addition, any investment income should be removed to reflect only earnings attributable to operations.

The recurring earnings base can then be capitalized by use of a market multiple.  Adding the value of non-operating assets such as excess cash, marketable securities, and other assets held for investment produces an estimate of enterprise value.  Value estimates of minority interests require discounts for lack of control and lack of marketability.

This methodology as steps:

1) Calculate an annual recurring earnings base.

a) Remove all non-operating income and expenses.

b) Adjust owner/officer compensation to market rates.

c) Remove all one time or non-recurring income or expense.

2) Add back all interest, income tax, and non-cash expenses such as depreciation, amortization
    and depletion expenses to arrive at EBITDA.

3) Apply a market EBITDA multiple and add non-operating assets to arrive at enterprise value.

4) Subtract interest-bearing debt from enterprise value to obtain a marketable equity value indication.

5) For minority interests, apply discounts for lack of control and lack of marketability to pro-rata control
    value.

This calculation provides useful information for most businesses. However, it may not be appropriate for holding companies or companies with low or negative earnings.