Valuing a Small Business: Implications of Different Income Tax Models
Journal of Legal Economics
A common method used to value a small business1 involves applying an aftertax discount rate to future aftertax returns (See, for example, Fishman, Pratt, Griffith, and Wilson 2003, chapter 5). The reason for using an aftertax discount rate is simply that it is aftertax discount rates that are observed (Bowles and Lewis 2000). To be consistent, aftertax discount rates must be applied to aftertax returns.2 Of course, estimating future aftertax returns requires an estimate of future average tax rates. This paper presents three different methods of modeling taxes in applying the discounted future returns method and compares the accuracy of each.
Bowles, Tyler J., and W. Cris Lewis. “Valuing a Small Business: Implications of Different Income Tax Models.” Journal of Legal Economics 12(3, Winter 2002/03):47-62. (Published January 2005).