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Business & equity valuations - Coggle Diagram
Business & equity valuations
Other valuation matters
Valuation premiums and discounts
Owner level premiums & discounts
Minority discount
% deducted pro rate to reflect absence of power
Marketability discount
% deducted from value of SH to reflect shares lack of liquidity
Control premium
% added pro rata for NCI to reflect control
Generally accepted valuation standards
Need to comply with certain professional valuation standards
Theory
Different definitions of value
Historic cost
Represents the original monetary sum paid for something
Market value
Price buyer is willing to pay & seller is willing to sell for
Fair market value
Concepts closely associated
Synergy = combination is greater than individual (mergers)
Highest and best use = consider highest and best use even if not current use
Preferred valuation inputs = value of identical asset traded in an active market with a quoted price
Amount item can be exchanged for involving a buyer and seller, where both parties have reasonable knowledge of relevant facts, considering the highest and best use with the transaction being @ arm's lenght
Intrinsic value
Most basic value of a business. Based on NPV of future cash flows
Ignore effect of synergy
Market capitalization
Formula : full market capitalisation = price per share x number of shares issued
Adjustments for some cases
Control premium = Full market capitalisation + control premium
Share options = Full market capitalisation + value of share option
Convertible securities = Full market capitalisation + value of pref shares and debt that's likely to be converted to equity
Treasury shares = price per share x (number of shares - treasury shares)
Liquidation value
Amount that could be realised if group of assets of company are sold separately
Valuation approaches
Replacement cost approach
What will it cost to acquire similar asset?
Income approach
What is a buyer willing to pay for an asset in today's monetary terms, with a given income stream in the future, adjusted for perceived risk
Market comparable approach
What is an identical / similar asset actually selling for in the market?
Principles of financial reporting vs business valuation
Items
Financial = record items meeting recognition criteria
Business = value incorporates all components of business
Valuation occurrence
Financial = after the fact
Business = before the transaction
Measure
Financial = measure value using mixed definitions
Business = measure market value
Focus
Financial = parts whereby values of individual assets & liabilities are determined
Business = on the whole whereby value of overall firm is appraised
Valuation methodologies
The system of methods that could be applied in performing a valuation
Principle valuation methodologies
Price of recent investment (market comparable approach)
Industry valuation benchmark (market comparable approach)
Multiples (market comparable approach)
Discounted cash flows from investment (income approach)
Discounted cash flows from underlying business enterprise (income approach)
Net assets (to different approaches)
Reasons for valuation
Acquisition or disposal of business, minority interest or majority interest
Valuation for financial reporting purposes
Valuation for tax purposes
An initial public offering
Further equity investment
As security for a loan, including management buy out
Factors affecting value
Relationship between value, risk & return
Business model applied
Investment in equity or net assets of a business
Business vehicle
Company
Close corporation
Business trust
Partnership
Sole proprietor
Level of control
Growth and return of business
Shares publicly traded
Going concern
Competition
Suppliers
Debt capacity
Demand for products / services
Business environment
State of asset
SWOT
Hidden factors
Due diligence investigation
Valuation methods
Earnings multiples
Valuation based on EBITDA multiple
Gordon dividend growth model
Market price multiples
Free cash flow
EVA
Net assets
Price of recent investment