Introduction to Business Valuation

Learning Outcomes

• Applications of Valuation

• Equity and Enterprise Value

• Asset Based Valuation

•Value

•Price

•Worth

Introduction To Valuation

Major resource allocation decisions are underpinned by an assessment of what projects are worth.

The valuation of the business may not be equivalent to the actual transaction price.

Price is what you pay. Value is what you get.

•Raising Money for Your Own Business

•Valuing a Company

•Evaluate New Projects

•Make Stock Recommendations

Applications of Value

•Saving for your kids’ education

•Pension Planning

•Your Mortgage

•Buying or Leasing a Car

•Deciding on an MBA

Application in business Application in life

• IPOs and sale of equity

•Mergers

•Acquisitions

•Reorganisations

•Spin-offs

•Liquidations

Applications of Value

LEGAL TAX

Litigation Tax Regimes

Collateral Corporate Structure

Insurance claims Capital Structure

Employee incentive plans

Applications of Value

Three Valuation Methods

•In asset based valuation, you value a business by valuing its individual assets. These individual assets can be tangible or intangible.

•In intrinsic valuation, you value a business based upon the cash flows you expect that business to generate over time.

•In relative valuation, you value a business based upon how similar businesses are priced.

Three Valuation Methods

• Accounting value: You could use the book value of the asset as a proxy for the estimated value of the asset.

• Intrinsic value: Estimate the expected cashflows on each asset or asset class, discount back at a risk adjusted discount rate and arrive at an intrinsic value for each asset.

• Relative value: Look for similar assets that have sold in the recent past and estimate a value for each asset in the business.

Enterprise Value

Enterprise Value is the market value of a company’s:

• Net operational assets +

• Value of its future growth opportunities +

• Intangible assets

Firm Value Using the Balance Sheet

Debt

Equity

Cash

Operating Assets

Enterprise Value

=

Debt

Equity

Cash

Operating AssetsEnterprise

Value is the market value of

the Balance Sheet

+

+

Equity Value

Equity value is the market value of a company’s shares to

its owners or shareholders.

Equity Value

-

Debt

Equity

Cash

Operating Assets

Equity Value is market value of

assets minus market value

of Debt

+

=

Equity & Enterprise Value

Sales

-COGS

Gross Profit

-Operating Expenses

Operating Income (EBIT)

-Interest Expense / Income

Profit before Tax

-Tax

Profit after Tax (Net Income)

Enterprise Value

Net Debt / Cash

Equity Value

Calculating Enterprise Value

Enterprise Value = Equity Value + Total Debt - Cash

Net DebtShare price * No. shares outstanding

Calculating Enterprise Value

Enterprise Value = Equity Value + Net Debt

Calculating Equity Value

Equity Value = Enterprise Value - Net Debt

Asset based Valuation

Valuing an entity based on its net assets (shareholders’

equity): total assets less total liabilities

When is Asset-based Valuation Relevant?

• Sum of the parts: If a business is made up of individual divisions or assets, you may want to value these parts individually.

• Liquidation: If you are liquidating a business by selling its individual components.

Asset-based Valuation

Relevant Sectors

•Investment Companies (eg. Real Estate, investment funds)

•Financial Services (eg. Banks)

•Natural Resources Companies

Case Study: Shaftesbury PLC Annual Report

Case Study: Shaftesbury PLC Annual Report

Considerations that need to be made when using the asset approach are:

• Premise of Value • Control • Marketability • Going concern