Nigeria Valuation Service Company
Valuation is the process of placing a value on a business or an assets. This involves review of management of the business, the prospective future earnings, the market value of the company’s assets, and its capital structure composition. This gives us a fair value that willing sellers and buyers should exchange to consummate the sale. Valuation provides an idea whether an assets is overvalued or undervalued by the market. It is typically in relation to market values.
Valuation exercises help us to place value on assets, liabilities and value of a business
Types of Valuation and Methodology
It is understandable for a business man to know the value of his business. Think the business valuation methodology as a “subjective science”. This means when valuing your business, you must apply standard valuation methods. The subjective means that every buyer’s circumstances and considerations are different, so for the same business two buyers may propose two different offers. A common way to know the value of your business is by having a look at your business balance sheet, which will give you the “book value” of your business, or total equity. In truth, however, your business’s book value is just one of many business valuation methods out there, all of which take different factors into consideration.
Business Valuation: There are many business valuation methods one can apply to determine the value of his business. The best valuation method typically depends upon why the valuation is needed, the size of your business, your industry, and other factors. The most common valuation methodologies are under-listed:
The Income Approach: The Income Approach quantifies the Net Present Value (NPV) of future benefits associated with ownership of the equity interest or asset. The estimated future benefits that accrue to the owner are discounted or capitalized at a rate appropriate for the risks associated with those future benefits. Common ways of using Income Approach valuation are:
The capitalization of earnings (or cash flow) methodology
Discounted cash flow methodology.
The Market Approach: Your business valuation can also be determined through market valuation approach. This is done by comparing your business with other similar businesses that have been sold the market. This approach can be used to calculate the business property’s value or as a portion of the valuation method for a closely held company. This approach can be utilized to find out the value of an intangible asset, security, or a business ownership interest. The market approach analyses the sales of every similar asset, and adjustments made for the differences in quality, quantity, or size, regardless of which asset is being valued.
Steps to Business Valuation:
Review business history and purpose of valuation
Determine valuation standard
Compare to similar businesses
Review assets and liabilities
Check financial statements
Estimate future earnings
Synthesizing the information.
The Asset-Based Approach:
Asset-based approach uses the current value of a company’s tangible net assets as the key determinant of fair market value. This approach is typically used where a business is not a going concern, or where a business is a going concern but its value is tied directly to the liquidation value of its underlying tangible assets and investments. The asset-based approach also provides a useful reasonableness check when reviewing the value conclusions derived under the income or market approaches.
Methods of Asset based approach:
Valuation of various assets can be made by using different methods. Valuation of fixed assets can be made in different ways. Some of the major methods are as follows:
In this method, your assets are valued on the basis of purchase price of the assets. It is very simple method of valuation of assets.
Market Value Method
Your assets can be valued based on their current market prices. There are two methods related to market value method. They are: Replacement Value Method (If same asset is to be purchased then on the basis of same value, valuation of assets can be done) and Net Realizable Value (It refers to the price in which such asset can be sold in the market. But expenditure incurred at the sale of such asset should be deducted).
Base Stock Method
Base Stock Method deals with company maintaining certain level of stock and valuation of stock is made on the basis of valuation of base stock.
Standard Cost Method
Some of the business organizations fix the standard cost on the basis of their past experience. On the basis of standard cost, they make valuation of assets and present in the balance sheet.
Average Cost Method
It is a simple method for the valuation of such assets which cannot be distinguished. Like petrol, petrol is kept in the tank but cannot separate its stock on the basis of lot. So, valuation of stock is made adding to all the cost and dividing by the quantity.
Steps to Asset-based Approach:
- Establish the principles, basis, and rules for asset valuation. These should comply with the valuation requirements provided.
- Compile an asset inventory that provides the base data for calculating asset values
- Calculate the initial value of the assets. This involves deriving appropriate unit rates for the different asset groups and subgroups and calculating the gross replacement cost for each asset within a group or subgroup
- Calculate the consumption of the assets, which involves calculating in-year depreciation, Assessing for in-year impairment and calculating loss in value when required
- Calculate the depreciated replacement cost, which involves calculating the depreciated replacement cost by reducing the replacement cost to reflect the current age, condition, and performance of assets, annual adjustments to the asset value to account for in-year depreciation and impairment
- Prepare the valuation report.
The benefits of adopting this approach include the following:
Long-term financial planning and budgeting;
Influence over senior decision makers’ investment decisions;
Performance assessment and benchmarking;
Prioritization of resource allocation, locally, regionally, and nationally;
Production of transparent information for stakeholders on the organization’s management of its road assets;
Equity Valuation Method Production of financial information that is compliant with local or International Financial Reporting Standards (IFRS).
Equity Valuation Methods:
can be classified into:
Balance sheet methods: Balance sheet methods are the methods which utilize the balance sheet information to value a company. These techniques consider everything for which accounting in the books of accounts is done. Balance sheet methods comprise of:
Book value: In this method, book value as per balance sheet is considered the value of equity. Book value means the net worth of the company. Net worth is calculated as follows Net Worth=Equity Share capital+ Preference Share Capital+ Reserves and Surplus-Miscellaneous Expenditure (as per balance sheet) – Accumulated Losses.
Liquidation value: Liquidation value is the value realized if the company is liquidated today. It is computed as follows: Net Realizable value of all assets-amounts paid to all creditors including preference shareholders.
Replacement value methods: This means the cost that would be incurred to create a duplicate firm is the value of the firm.
Earning Multiple method: Earnings multiple or Relative Valuation methods are also called comparable methods because they use peers or competitors value to derive the value of the equity. The importance here is of deciding which factor to be considered for comparison and which companies should be considered peers. The following under-listed are methods of Earning Multiple:
Price to Earnings Ratio: The price-earnings ratio, often called as P/E ratio is the ratio of company’s stock price to the company’s earnings per share. It is a market prospect ratio which is useful in valuing companies. In simple words, P/E ratio is obtained by comparing the market price per share with its relative dollar of earnings per share. The relationship between the two essential parts of this ratio i.e. Market value of the stock and its relative earnings shows what the market is willing to pay for a stock based on its current earnings. Thus, it is also known as the price multiple or the earnings multiple.
Price to Book Value: Companies use the price-to-book ratio to compare a firm’s market to book value by dividing the price per share by book value per share (BVPS). An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation.
Price to sales ratio: The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues. The P/S ratio can be calculated either by dividing the company’s market capitalization by its total sales over a designated period – usually twelve months, or on a per-share basis by dividing the stock price by sales per share. The P/S ratio is also known as a “sales multiple” or “revenue multiple.”
Discounted cash flow methods:
Discounted cash flow methods are based on the fact that present value all future dividends and the future price represent the market value of equity. The following are the discounted cash flow methods:
Dividend Discount Model: The dividend discount model tries to find the present value of future dividends of a company to derive the present market value of equity.
Fresh cash flow model: This model is based on free cash flows of the company. Similar to above model, it discounts the free future cash flows of the company to arrive at an enterprise value. To find the value of equity, value of debt is deducted from enterprise value.
Steps involved in Equity Valuation:
Understanding the business. To understand the business, you have to evaluate industry’s prospects, competitive position, and corporate strategies. Understanding the business also involves analysis of financial reports, including evaluating the quality of a company’s earnings.
Forecasting company performance.
Selecting the appropriate valuation model.
Converting forecasts to a valuation
Mergers And Acquisition Valuation:
In today’s business climate, constantly increasing competition, shifting profit margins, and rapidly changing technology have directed businesses to M&A as a faster way of growing. M&A means the combination of two or more companies, including their assets and debts, to become a single company. As a result of mergers, current companies may lose their legal entities and create a new company, or combine with each other under the legal entity of one of the current companies. Sometimes, companies obtain a majority share of another company. The following are the methods of Merger and Acquisition Valuation:
Balance-sheet-based methods attempt to identify the value of a business by examining the balance-sheet values of their assets. This is a traditional approach dictating that the value of a business is determined considering the assets owned by that business, regardless of the future. Balance sheet-based methods comprise:
Book value: The book value of a business is calculated by subtracting the debts from the total value of the assets on the balance sheet.
Adjusted book value: The adjusted book value of a business can be calculated by identifying the market values of the assets in the balance sheet, and adding the values of the intangible assets which are not included in the balance sheet. This eliminates the negativities of book value to some extent.
Replacement-cost Value: This value is calculated by considering the costs of obtaining assets that are similar in all ways to the assets in the balance sheet of the company. This method does not consider intangible assets either, which means that it is not a suitable method for M&As.
Liquidation value: The liquidation value is calculated by subtracting the debts from the value, which is created by selling all assets of the company. It is the lowest value that an establishment has.
Income Statement and Market-Based Methods:
In the income statement and market-based method, the value of the company is determined considering the income statement and market data, rather than the data on the balance sheet. The models are:
Market Price: The market price of company is usually calculated considering the market prices of their shares. The market price of shares is a value that varies by supply and demand conditions on the market.
Earnings per Share: In M&A, the earnings/price ratio (E/P) is commonly used, particularly in the valuation of non-public companies, as it is easy to apply. The E/P for non-public companies is unknown because there is no market price for their shares. In these situations, the reference is the E/P of another company which is active in the same sector as the company to be valued, has similar characteristics, and is traded in the stock exchange.
Price/Sales Ratio: The price/sales ratio (P/S) method is similar to the E/P method. The P/S of a company similar to the establishment to be valued or the P/S of the sector is multiplied by the sales of the establishment in question. This method has disadvantages similar to the E/P method.
Discounted Cash Flow Method: The fundamental valuation in M&A is the Discounted Cash Flow Method (DCF), which is based on capital budgeting theory. The discounted-cash-flow approach in an M&A setting attempts to determine the value of the company by computing the present value of cash flows over the life of the company.
Steps to merger and acquisition valuation:
Develop an acquisition strategy: Developing a good acquisition strategy revolves around the acquirer having a clear idea of what they expect to gain from making the acquisition.
Set the M&A search criteria: Determining the key criteria for identifying potential target companies (e.g., profit margins, geographic location, or customer base)
Search for potential acquisition targets: The acquirer uses their identified search criteria to look for and then evaluate potential target companies
Begin acquisition planning: The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is
Perform valuation analysis: Assuming initial contact and conversations go well, the acquirer asks the target company to provide substantial information (current financials, etc.) that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target
Negotiations: After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer; Once the initial offer has been presented, the two companies can negotiate terms in more detail
M&A due diligence: Due diligence is an exhaustive process that begins when the offer has been accepted; due diligence aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations
Purchase and sale contracts: Assuming due diligence is completed with no major problems or concerns arising, the next step forward is executing a final contract for sale; the parties will make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase
Financing strategy for the acquisition: The acquirer will, of course, have explored financing options for the deal earlier, but the details of financing typically come together after the purchase and sale agreement has been signed.
Closing and integration of the acquisition: The acquisition deal closes, and management teams of the target and acquirer work together on the process of merging the two firms.
Property valuation is carried out for various purposes such as for insurance, payment of compensation for state acquired lands, taxation, rent/lease, sale and mortgages among others. It has been recognized over the years that property valuations for the various purposes is fraught with a lot of constraining factors, conditions and contradictions which often distort estimated values.
Methods of property valuation:
Sales Comparison Approach:
The sales comparison approach is the most frequently used method for determining the value of residential real estate, although it is also suitable for valuing some types of commercial properties. Using this approach, the property’s value is based on what similar properties have sold for recently in the same market.
The cost approach starts by calculating how much the property would cost to rebuild, either as an exact replica of it or for the construction of a similar property with comparable features. The appraiser then deducts an amount for accrued depreciation, which represents the reduction in the value of the property over time as a result of obsolescence or wear and tear. The theory here is that no one would pay more for an existing property than it would cost to construct the same property from scratch.
This method uses the property’s rental income, or potential for income, to substantiate its market value. Apartment buildings and duplexes are examples of properties that you might value using the income approach.
Steps to property valuation:
Know the features of the property: Try and list the features and benefits of the property in question. This will help in determining the value to tag on the property.
Find comparable properties: The next step is to find the sales prices of at least three properties that are comparable to the subject property. This means they should share some, or ideally all, of the features you’ve listed. Make a note of any different characteristics.
Calculate a Benchmark Price: Once you’ve found your comparable, run a quick calculation to get a benchmark valuation for the subject property. For example, if you find three comparable properties that sold for ₦450,000,000 ₦480,000,000 and ₦435,000,000 respectively, you would take the average of these figures –₦455,000,000.
Adjustment in price: As explained earlier, valuing property is more art than science and this is the point where the valuation gets subjective. Physical characteristics represent the most obvious differences between two comparable properties, one might be in better repair than the other. Therefore, you need to adjust the price up or down to account for quality, condition, design and special features.
Arrive at a final price.
If you require support in conducting a valuation, please call us today on 08023200801 or email firstname.lastname@example.org