The Continuing Evolution of the BUM.

This article provides an overview of the buildup method (BUM) in business valuation, drawing on the author's extensive experience. The BUM is a widely accepted approach for estimating the cost of capital in valuing closely held businesses. However, the article cautions that there can be significant variations in estimates among professionals, highlighting the need for professional judgment. The article explores the relationship between risk and the cost of capital, distinguishing between systematic and unsystematic risk. It also discusses the importance of consistency in capitalizing or discounting benefit streams and provides insights into estimating terminal value. The article suggests qualitative and quantitative models for assessing risk profiles but emphasizes the role of professional judgment in determining a reliable discount rate. It concludes by mentioning empirically-based resources and data that can assist in cost of capital analysis. The article also addresses the challenges of quantifying unsystematic risk and reducing reliance on professional judgment in valuing closely held businesses, suggesting the use of industry risk premia to shift unsystematic risk to systematic industry risk. The author presents an analytical framework for estimating unsystematic risk but underscores the importance of professional judgment in the valuation process. The article concludes by sharing the author's experience in valuing businesses and the lessons learned in assessing risk and determining the cost of capital. [Extracted from the article]