Valuations: Big Picture

Question 1

Most common need for valuation

Answer 1

• sale of business (or sale of common shares)
• valuations are also used for sale of assets or group of assets – but not needed as often, and easier to determine value
• takeover bud, private going public, or tax reorg

Question 2

“art” vs “science”

Answer 2

• valuations is an art not a science
• professional judgement used

Question 3

Underlying principal of business valuations

Answer 3

• FMV
• FMV = highest price available in open unrestricted market between arms length parties

Question 4

Approaches

Answer 4

• asset based
• income based
• market based

Question 5

Asset based approach

Answer 5

• liquidation (not going concern) (Forced (lower consideration) or Orderly (more consideration))
• adjusted net assets (going concern) (holding companies) (active with no excess earnings)
• replacement costs (rarely used) (insurance purposes)

Question 6

Income based approach

Answer 6

• capitalized cf (active operations and excess earnings)
• discounted cf (startup stage with negative income)
• capitalized earnings (active with excess earnings)
• discounted earnings (mergers and acquisitions)

Question 7

Market based approach

Answer 7

• assets with active market (going concern with public comparable information)
• comparable transaction (going concern with public comparable information)

Question 8

Going concern

Answer 8

• expected to continue operations and cash flows

Question 9

Non going concern

Answer 9

• not expected to succeed in business