ValuAdder Business Valuation Blog

Business valuation tips, updates and advice. Pick up a few suggestions on how to value a business. Feel free to browse the contents or share your thoughts by leaving a comment.

Three cheers again for the ValuAdder engineering team for their outstanding work on the all new ValuAdder V7 product.

Designed on top of the leading edge Scala and Java technology, ValuAdder V7 brings an important new valuation tool in 2012 – the employee stock option (ESO) valuation system.

Hull-White binomial model for ESO valuation

The tool implements the standard Hull-White Binomial Model to value executive stock options. One of the key challenges in valuing such options is estimation of the underlying stock price volatility, especially for a privately owned firm whose stock does not trade on the open market.

That is where the powerful business valuation methods available in ValuAdder V7 come in. You can determine the value of a company over a period of time and calculate the per-share stock price at each point.

Stock price volatility estimation for private companies

Using the ValuAdder stock option valuation tool you can then determine the stock price volatility as the variance of the stock returns. Of course, for a public company stock, the actual market prices observed can be used directly. You can also use guideline public companies for comparative stock price volatility estimation.

A set of key parameters to value the employee stock options

The ValuAdder employee stock options valuation tool lets you account for a set of key option grant parameters:

  • Option exercise or strike price
  • Current stock price
  • Vesting period
  • Option expiration time
  • Interest the company pays on its debt capital
  • Dividend payout rate
  • The expected rate at which the employees leave the firm

Stock option sensitivity analysis

Need to study how these various parameters affect the value of ESOs? Not a problem! You can run a number of what-if scenarios to see how sensitive the stock option value is to any or all of these key factors.

Binomial Model endorsed by key accounting standards

We are very excited about this addition to the ValuAdder business valuation system product. Not only can employees and key decision makers determine the value of executive stock options easily, the Binomial Model used in ValuAdder is the recommended way to value employee stock options.

Companies need to account for this compensation on their financial statements. In fact, the Binomial Model of option valuation is endorsed by the Financial Accounting Standards Board (FASB) Statement No 123 R and the International Financial Reporting Standards (IFRS).

Employee Stock Option Valuation Tools

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