The Valuation Process - Value Management Inc

THE VALUATION PROCESS

By William J. Pembroke Value Management Inc.

STEPS

valuemanagementinc.com

1. Data Gathering

2. Analysis

3. Application of Approaches

http://valuemanagementinc.com

DATA GATHERING

DATA GATHERING


• Starts with document request

• Schedule due diligence meeting/call

• Ask about: operations, marketing, administration,

financial performance and future outlook

• Tour facility

• Independent research on the company’s industry

and markets


DATA GATHERING


• Financial documents

• Shareholder agreements

• Employment and management contracts

• Product & Marketing Brochures

• Projections

• Details on prior offers and/or transactions

• Past valuations or consultant reports


DATA GATHERING


• History

• Markets & Marketing Efforts

• Competition

• Management

• Operations

• Facilities & Equipment

• Financial Overview


DATA GATHERING


1. Industry

2. Demographics

3. Economic Review


ANALYSIS

ANALYSIS


•Purpose: analyze past performance to determine

influence on future performance

•Qualitative & quantitative analyses of the subject

•Comparison vs. other companies and industry


ANALYSIS: INCOME STATEMENTS


Eliminate non-recurring

items

Adjust for Discretionary

Items

Accounting Related

Adjustments

Eliminate non-operating

itemsComparisions


APPLICATION OF APPROACHES

THE THREE APPROACHES


1. Income Approach

2. Market Approach

3. Asset Approach

TO VALUE


INCOME APPROACH


Earnings or cash flow are general the most

important valuation factor for a profitable operation


INCOME APPROACH


Most Widely Used Approach

•Discounted Cash Flow Method

•Capitalization of Cash Flow Method


INCOME APPROACH


Based upon the theory that the value of a business

depends upon the future economic benefits it

produces.


INCOME APPROACH


Future economic benefits are defined as the likely level of earnings or

cash flow that a potential buyer could expect to realize. After

analyzing the Company's potential, the investor assesses the risk

(degree of uncertainty in obtaining future projections) involved in the

situation. A buyer, realizing that alternative investments are available,

seeks to maximize return while minimizing risk. For a given level of

risk, investors select the investment promising the highest return. For

investments yielding similar returns, the investor chooses the one

with the lowest level of risk.


MARKET APPROACH


Based on the premise that prices paid for one company provide an

indication of what a buyer would be willing to pay for stock in another

company sharing similar characteristics. This approach entails

examination of the relationship between prices that buyers have been

willing to pay for stock in kindred companies and various quantifiable

factors. The relationships are adjusted to reflect the differences

between the comparative group and the subject company. At that

point, derived ratios are applied to the subject company in order to

establish a value.


ANALYSIS


• Guideline Public Company - identify publicly-traded companies that share similar

investment characteristics with the subject

• Guideline Mergers & Acquisitions - identify recent transactions involving majority

interests in target companies that provide a reasonable basis for comparison to the

relevant characteristics of the subject company

• General Market Benchmarks - GF Data

• Rules of Thumb - sometime used as a starting point in the sale of a business

• Prior Transactions in Subject Company - can be the best indicator of value

• Buy/Sell Agreement


ASSET APPROACH


Examines the value of the tangible assets the

company has accumulated to date.


ASSET APPROACH


Examines the value of the assets that the Company

has built to date on a:

•Going Concern Basis

•Liquidation Basis

This approach is generally given little weight in the

valuation of a going concern


PRELIMINARY VALUE


We review our preliminary conclusion of value with

the client (owner(s), attorney and/or financial

advisor) and discuss the pertinent factors impacting

our conclusion.


REPORTING


Our conclusion is presented in the form of a written

report discussing the factors listed in the following

slides in conformity with Revenue Ruling 59-60

(establishes guideline for appraising the stock of a

closely-held corporation) and the Uniform

Standards of Professional Appraisal Practice

(USPAP)


REPORTING


Revenue Ruling 59-60 factors to be examined:• An understanding of the business and its evolution: Knowledge of the company's

development may shed insight as to its future performance.

• Degree and level of competition.

• Book Value

• The financial condition of the business. Financial statements should be examined

for a representative period prior to the valuation date and an analysis performed of

the pertinent ratios, trends and changes.

• The earnings capacity of the company.

• Its dividend‑paying capacity.

• Whether or not the company has goodwill or other intangible value.

• Transactions in the stock of the company.


REPORTING


Revenue Ruling 59-60 factors to be examined:• The national economic condition and outlook and, if the company's market is

concentrated in a specific geographic region or regions, the condition and outlook

of the economy in such regions.

• The condition and outlook of the industry to which the company belongs and the

company's performance in comparison to the industry.

• The attitude of investors toward companies which are comparative to the subject

company.


CONTACT INFORMATION


William J. Pembroke Financial Analyst

[email protected]

2370 York Road, E2 Jamison, PA 18929-1031Value Management Inc.


Date post:	09-Feb-2017
Category:	Business
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The Valuation Process - Value Management Inc

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