Valuation Methodologies
December 23, 2018
Admin
business valuationnet asset valuefair market value NAVFMVEsopValuationAssetsValuationSharesValuation
ASSET APPROACH
An asset-based approach is a type of business valuation that focuses on a company's net asset value (NAV), or the fair market value (FMV), of its total assets minus its total liabilities to determine what it would cost to re-create the business.
NET ASSET VALUE APPROACH
For calculating the Adjusted NAV, the valuer should factor in the fair value of the assets, contingent liability, Tax shield on accumulated losses, the impact of Auditor qualification, and Due Diligence, money to be received from warrants, stock options and impact of corresponding shares, etc.
INCOME APPROACH
The Income-based method of valuation based on the premise that the current value of any business is a function of the future value that the company can expect to receive.
CAPITALIZATION OF CASH FLOW APPROACH
- Capitalization refers to the return on investment that is expected by an investor for taking on the risk of operating the business (the riskier the business higher the required return)
- The earnings figure to be capitalized should reflect the true nature of the business, such as last three years average, current year or projected year excluding the impact of any extraordinary items not expected to accrue in future.
- The Capitalization of Cash Flow Method is most often used when a company is expected to have a relatively stable level of margins and growth in the future.
DISCOUNTED CASH FLOW APPROACH
- DCF is a method of valuing a company, typically a going concern by estimating the cash flows & adjusting it for the time value of money
- In this method, all future cash flows of the company are estimated and discounted by an appropriate discount rate (to cover riskiness or expectation) to give their present values (PVs).
MARKET APPROACH
In this method, value is determined by comparing the subject, company with its peers in the same industry of the similar size and region.
COMPARABLE TRANSACTION MULTIPLES METHOD
- CCMM uses the valuation ratio of a publically traded company and applies that ratio to the company being valued
- The valuation ratio typically expresses the valuation as a function of a measure of financial performance or book value:
MARKET VALUE METHOD
- The market price method evaluates the value on the basis of prices quoted on the stock exchange
- Average of quoted price is considered as indicative of the value perception of the company by investors operating under free market conditions
COMPARABLE COMPANY MARKET MULTIPLES APPROACH
- It is one of the conventional methods to value a company for sale.
- The main approach of the method is to look at similar or comparable transactions where the acquisition target has a similar client base to the company being evaluated
