Business Valuation

Companies seek business valuations for corporate governance or regulatory reasons, or management review for critical input for decision making process. In these instances the company is at a critical moment in its life. It may be planning a major acquisition, resolving a shareholder, or joint venture dispute, seeking to reduce the gap between intrinsic and market value.

Company may require:

• A fairness opinion on a transaction is to satisfy regulatory requirements or corporate governance concerns
• Independent and objective advice, to determine the right price to pay or accept for a business
• Valuations of unlisted companies, businesses, shareholdings, goodwill, know-how, brands and other intangible assets
• Advice for Joint Ventures / Alliances on equity splits at formation or exit in an independent or advocate role
• Support for litigation or arbitration, particularly expert witness and adjudication work in business valuation disputes
• Valuation opinions for unquoted debt or equity instruments
• Valuations of intangible assets or intellectual property such as brands, know-how, trademarks, customer lists, intellectual property rights (IPR) and goodwill for commercial, tax or regulatory reasons.
• Valuations for regulatory purposes e.g. Takeover Code, the Companies Act
• Purchase Price Allocation for IFRS
• Impairment review of assets for IFRS
• Complex valuations including highly-leveraged businesses and international projects
• Investment decision analysis
• Maximizing tax benefits for individuals and organizations.

Business valuation experts recognizes that a valuation is not a simple exercise of numbers. Valuers spend time working to understand the business dynamics and its key value drivers. Combine this with sector knowledge and benchmarking analysis to offer value-added advice.

Approaches to Valuation

Analysts use a wide spectrum of models, ranging from the simple to the sophisticated. These models often make very different assumptions about the fundamentals that determine value, but they do share some common characteristics and can be classified in broader terms. There are several advantages to such a classification -- it makes it is easier to understand where individual models fit in to the big picture, why they provide different results and when they have fundamental errors in logic.

In general terms, there are three approaches to valuation.

1. Discounted cashflow valuation, relates the value of an asset to the present value of expected future cashflows on that asset. 

2. Relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales.

3. Contingent claim valuation, uses option pricing models to measure the value of assets that share option characteristics.

While different methods can yield different estimates of value, one of the objectives of discussing valuation models is to explain the reasons for such differences, and to help in picking the right model to use for a specific task.

Asset Valuation Ch-1

Asset Valuation

What is an 'Asset Valuation'

An asset valuation is a method of assessing the worth of a company, real property, security, antique or other item of worth including intangible assets. Asset valuation is commonly performed prior to the sale of an asset or prior to purchasing insurance or loan against mortgaging an asset.

A valuation is also the process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.

BREAKING DOWN 'Asset Valuation'

Asset valuation may consist of both subjective and objective measurements. For example, in valuing a company, there is no financial statements that tells how much its brand name is worth; this aspect of asset valuation must be subjective. On the other hand, net profit is an objective measurement based on the company's income and expense figures.

Common methods for determining an asset's value include comparing it to similar assets and evaluating its cash flow potential. Acquisition cost, replacement cost and deprival value are also methods of asset valuation.

For example, an analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of assets.

Judging the contributions of a company's management would be more of a subjective valuation technique, while calculating intrinsic value based on future earnings would be an objective technique.