31 October 2012
There a host of factors that go into determining value. Some of them are listed below:
1. Level of technology 2. Design and engineering 3. Material of construction. 4. Aesthetics 5. Features in a product, asset or business 6. Performance of an asset or business 7. Reliability 8. Maintenance and upkeep. 9. Service features 10. Level of obsolescence of asset, or stage of product in its life cycle. The various factors relevant in a business valuation are:• The nature of the business and its history from its inception.• The economic outlook in general and the condition and outlook of the specific industry in particular.• The book value and the financial condition of the business.• The earning capacity of the company.• The company’s earnings and dividend paying capacity.• Whether the enterprise has goodwill or other intangible value.• Sales of the stock and the size of the blocks of stock to be valued.• The market price of the stock of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market.• The marketability, or lack thereof, of the securities. Misconceptions about Valuation: There are a number of misconceptions about valuation and some of them are given below:1. Myth 1: A valuation is an objective search for “true” value.Truth 1.1: All valuations are biased. The only questions are how much and in which direction.Truth 1.2: The direction and magnitude of the bias in your valuation is directly proportional to who pays you and how much you are paid.2 Myth 2: A good valuation provides a precise estimate of value.
Valuation Basics There are no precise valuations.The payoff to valuation is greatest when valuation is least precise. The more quantitative a model, the better the valuation.One’s understanding of a valuation model is inversely proportional to the number of inputs required for the model.Simpler valuation models do much better than complex ones. Valuing a private business should only be done when the business is ready to be sold or a lender requires a valuation as part of its due diligence process. Although the above situations require valuations to be carried out, effective planning for ownership transition requires a regular valuation of the business. Businesses in an industry always sell for x times the annual revenue (the revenue multiple). So why should valuation of the business be done by an external valuer?While median multiple values are commonly used as a rule of thumb, they do not represent the revenue multiple for any actual transaction.6. Myth 6: The business should be at least worth equivalent to what a competitor sold his business for recently.Truth 6.1: What happened a few months ago is not really relevant to what something is worth today. What a business is worth today depends on three factors: 1) how much cash itgenerates today; 2) expected growth in cash in the foreseeable future; and 3) the return buyersrequire on their investment in the business. Therefore, unless a firm’s cash flows and growthprospects are very similar to the competitor firm, that firm’s revenue multiple is irrelevantto valuing the firm. Also, the current value of the business is likely to be different than a fewmonths ago because economic conditions may have changed.7. Myth 7: How much a business is worth depends on what the valuation is used for!Truth 7.1: The value of a business is its fair market value, i.e., what a willing buyer will pay a willing seller when each is fully informed and under no pressure to transact. The business loses money, so it is not worth much. While most private businesses may appear to lose money, the cash a business generatesdetermines the value of the business. Quantifying the size of discretionary expenses is often acritical determinant of the firm’s valu
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