When valuing a business entity, it is generally advisable to use more than one approach say an income approach using discounted cash flow analysis and a market approach based on market multiples and then to reconcile the two indications of value to give an overall basis for negotiation with other interested parties. The latter could include the tax authorities, or even the auditors.
The income approach will most likely employ discounted cash flow analysis, though there are different methodologies and philosophies of how to perform such an analysis, including:
1. the more conventional approach based use of the Capital Asset Pricing Model (CAPM) and on the assumption of a fixed optimal capital structure with use of the weighted average cost of capital (WACC) as the discount rate, versus
2. the adjusted present value (APV) approach where the optimal level of debt can be anticipated to vary over the life of the investment.
In either case, however, a key requirement will be the preparation of a credible business plan and financial overlay, in which context the application of appropriate techniques to ensure the integrity of the data input and of the assumptions used, is of paramount importance.
The market approach will involve market multiples but, similarly, these can be either transaction-based or else based on those of quoted guideline companies. In either case, the key concerns will be "comparability" and "relevance". In other words, it is important that these other companies face a similar competitive environment to the subject company, and that the chosen multiples are both significant and relevant to the task of valuing the company. In this context:
1. the transactions (sales or purchases of comparable companies) should preferably have taken place within the past two or three years, and that the competitive environment has not changed significantly over the interim period; and
2. any quoted guideline companies are likely to be significantly larger or smaller, have more or less diversified earnings streams, be growing more or less quickly than the subject company and/or may recently have made significant acquisitions or divestments. Therefore it can be anticipated that various adjustments to the multiples used will be necessary in order to improve the level of comparability between these companies and the subject company (with similar concerns applying to transactions).
Again, it is vital to use appropriate techniques and methodologies to ensure a high degree of comparability and relevance in the use of market multiples.
The cost approach is the third generic approach to valuing businesses, though it tends to be more relevant in the context of the "cost-to-recreate" the business rather than in terms of a sum-of-the-assets approach. Nevertheless the latter does provide a helpful perspective as a credibility check on values arrived at using the other approaches.
EVA/MVA (Economic Value-Added /Market Value-Added) and CFROI (Cash Flow Return on Investment) methodologies: although nominally alternative examples of income-based approaches using discounted cash flow techniques, EVA/MVA and CFROI methodologies represent a fairly radically different way to approach the valuation of businesses. Essentially these techniques are more relevant to the appraisal of the management teams themselves rather than to the businesses which they are managing. As such these techniques are perhaps of greater relevance for portfolio investors such as fund managers and private equity investment vehicles.

Formal training courses organized as modules covering:

Income approaches based on the use of discounted cash flow analysis including, as necessary:
1. the CAPM/WACC approach
2. APV (adjusted present value)
3. EVA/MVA and
4. CFROI methodologies
Problems and challenges associated with each methodology including:
1. capital structure issues, including "market participants" versus target;
2. problems in determining the true costs of bankruptcy (with specific reference to APV);
3. in-depth examination of Equity Risk Premium and country risk premiums;
4. other influences affecting the choice of an appropriate discount rate including size premiums, sum betas, and fundamental measures of risk.
Market approaches based on the use of market multiples, being based on transactions and/or the analysis of quoted guideline companies.
1. Techniques to help address the problems of "lack of comparability" including adjustments for differences in size, risk and growth, control;
2. Techniques to improved the quality of the data used including the use of brokers forecasts, adjustments for significant acquisitions and/or divestments, differences in gearing and/or funding vehicles, etc.
Case study involving review of the information presented to the Board in the context of a decision whether or not to proceed with an acquisition, and how much to bid for the target under the conditions of a competitive bid.
Handouts showing the outputs from a large comprehensive integrated valuation model, based upon analysis of the above case study, indicating how many of the additional analysis and/or adjustments may be carried out in practice.

Tailor-made in-house training: to include use of the supplied simplified Excel Business Valuation template containing both income and market approaches, as the basis for more sophisticated adjustments and analysis to improve the analysis.

Location

We can arrange to conduct courses in the United Kingdom and in any other countries, world-wide.

Other valuation assistance

Alternatively, we can provide you with our formal professional opinion as to the value of any of business entity requiring to be appraised. We will work closely with your people in defining, and then gathering, the information relevant to any such valuation exercise. We will liaise with the auditors to address any concerns or queries raised by them and to ensure that their requirements for a credible, well supported and well documented conclusion of value are met.

Who should attend?

Finance directors
Investment bankers
Chief accountants
Company secretaries
Other finance staff responsible for IFRS implementation
Audit partners and specialist staff
Valuation experts seeking to acquire expertise in valuing businesses.

How you will benefit

Our courses are tailored to the needs of our clients. For example, you may want your specialist financial/audit staff to receive in-depth training in all aspects of business valuations to be carried out for tax purposes - perhaps because ownership has crossed an international boundary - or in conjunction with the reporting of acquisitions under the requirements of IFRS 3: Business Combinations. Alternatively, you may need to gain an insight into how your firm may value acquired businesses, for the purposes of subsequent impairment reviews of acquired Goodwill.

Contact

Please call Hugh Osburn on +44 (0) 1257 272899 or email: hjo@adopttraining.co.uk or enquiries@adopttraining.co.uk

Relevant articles available on this site:

6. Valuing your unquoted companys shares
11. Determining Discount Rates
12. More on Discount Rates; Escaping the Labyrinth
13. SME Valuations: Discount Rates and Goodwill
Other material:
IIR Fin Training_3_EVA MVA and CFROI_slides_May08

Menu

Meeting your business valuation needs

Relevant articles available on this site: