Brad Caldwell Flashcards
Business Valuation is based on a…
range of assumptions - professional judgement plays a key role:
* assessment of risks
* industry/institutional knowledge
* access to data
What drives the value of a business? (4)
Earnings
Assets
Risk Assessment
Other Factors - strategic value, assets with values independent of cash flow
Understanding the Business - must consider: (8)
Competitive Advantage
Industry Outlook
Track Record
Customer Base
Governance
IP and ability to protect IP
Regulatory Environment
ESG
Barrier to business valuation in NZ…
imperfect information as an SME economy doesn’t always have access to all the information required
Enterprise Value
Firm Total Value representing both debt and equity
Equity Value
measure of company equity securities - EV - Net Debt = Equity Value
Net Debt
Debt + Cash
3 Valuation Methodologies
DCF
Capitalisation of Earnings
Net Tangible Asset Value
DCF (3)
based on NPV of future FCF
WACC reflects risk profile of business and forecasted FCF - unobservable metric
preferred method
Capitalisation of Earnings
built of theory
- comparable businesses engaged in similar activities will have similar operating and financial risks hence can be valued using similar multiples of earnings
- default method
Net Tangible Asset Value
Used when assets of company have a value independent of profitability of company - used to set a floor value
Key Components of CoE (6)
select earnings basis/measure - EBIT/EBITDA
assess future maintainable earnings
select an earnings multiple
calculate EV
subtract net debt
equity value
When assessing future maintainable earnings, we must consider? (2)
are historical earnings a good proxy for future earnings? - trends/fluctuations/industry cycle/track record of achieving budgets
earnings normalisation - one off events
Earnings Multiples are…(3)
easier to obtain
less relevant when valuing 100% of company due to implicit minority discount
Multiples based on recent transactions are …. (2)
more relevant when valuing 100% of company - no minority discount
often more difficult to obtain
