Business Valuation Essay

Submitted By sam131090
Words: 1732
Pages: 7

Valuation of Assets, Projects and Companies

1. Introduction
When you buy or sell a business, you need a benchmark around which to negotiate price. As a buyer, you may be prepared to pay more than this (called the ‘acquisition premium’), because buying a specific business has particular advantages to you, such as gaining control of supply, or better access to the marketplace; or it could be that acquisition allows for economies of scale in your enlarged business. Sellers may be prepared to take less than a guideline price (the ‘seller’s imperative’), because they have particular drivers to sell, such as personal reasons or the need to raise cash to make another investment.
Prudent valuers will use two or more valuation methods to generate and understanding of the probable value of a business.
There are four categories of business valuation, and different methods within these categories:
• Asset valuation
• Market valuation
• Discounting future cash flows
• Income or profit multiples

2. Asset Valuation
This involves working out the net asset value of the business, and in its simplest form, is done from the balance sheet, by cumulating the stated values of assets, and debiting the total value of all liabilities.
This type of valuation is valid for stable businesses with a lot of tangible assets which have a current market valuation, such as a property company.
Such a valuation is not a trustworthy one in most other cases, because the ‘book’ value of some assets may be understated if shown at original cost rather than current ‘fair value’, and stock and work-in-progress will be valued at cost. Also, the method does not include any valuation of goodwill, which may be an important reason for acquiring the business. A service company may have a good clientbase and excellent staff. There may also be significant intellectual property which is not included as intangible assets on the balance sheet, such as significant R & D which is some way to producing a valuable product.
In the course of a due diligence process, asset values can be established more reliably.
It is also possible to achieve a valuation of goodwill. This involves the ‘excess earnings’ method. The asset value of the business is assessed, then the income stream which this should generate is estimated. This is next compared with the actual earnings stream. The difference should be the value of goodwill, which can be capitalised and added to the asset vasluation figure to give the total value for the business.
These methods of company valuation provide variations on the premise that the value of an company, asset or investment is the present value of the net cash surpluses that the asset generates.
• Discounted dividends. The present value of forecasted future dividends.
• Discounted cash flow analysis. Discounting future predicted cash flows at the firm’s estimated cost of capital.
• Discounted abnormal earnings. Valuing as the sum of book value and the present value of forecasted abnormal earnings.
• Discounted abnormal earnings growth. The sum of capitalised next-period earnings forecast and the present value of forecasted abnormal earnings growth beyond the period.

3. Market Valuation
This attempts to generate a value for a business through using share prices, in the case of listed companies, or using the comparison of companies which have sold, in the case of private companies.
Share Price
Current share price can be used, using either the price / earnings ratio (share price over earnings per share) or the share price to book value (share price over net book value of assets). Either ratio is multiplied by net income to derive the company valuation.
Comparitive Pricing
This compares a company with another which has a known value through recent sale, or through calculation. The price of that company over EBIT provides a factor to then multiply against the EBIT of similar companies to give an indicative price.
Of course, there is…