Asset Based Business Valuation

Asset Based Business Valuation – Just as there are several reasons to seek a business valuation, there are several different types of valuation methods that can be used to calculate a fair and reasonable value for a business or its assets. that profession. Choosing the best valuation method is the first step in determining the value of your business or business assets. There are a number of considerations to consider when deciding which type or types of valuation to use for a particular case, including the rationale for the valuation, the industry, and the characteristics of the particular business. In many cases, a combination of valuation analysis methods is required to arrive at fair value. In this article, we will look at the different valuation techniques that are most widely used and accepted in accounting practice, and which valuation techniques are best suited for each purpose. Purpose of Valuation Several situations require determining a company’s current financial value: Desire to sell business for reasons of retirement, divorce or health or family Need for debt or financing equity to secure expansion or solve cash flow problems. partnership or LLC member Sale of shares of the business by a partner or member Calculating value for tax purposes The reason the valuation is performed will determine the scope of the valuation analysis – that is, establishing value property for property tax purposes, or to determine the value of the business for sales purposes? The rationale for the valuation will provide an essential data point for the best valuation analysis methods to use. (Tweet this!) Need an experienced analyst to help determine the most appropriate valuation method – and provide an expert valuation? Schedule a free discovery call with. Types of Valuation Methods Three main types of valuation methods are commonly used to determine the economic value of a business: market, cost, and income; Each method has advantages and disadvantages. In the following sections, we explain each of these valuation methods and the scenarios that fit each of them. We’ll also look at examples from the power industry to demonstrate how each method can be used to value a particular business asset. Market Valuation Methods There are basically two market approaches to valuing a business. The first is dependent on finding comparable companies, analyzing price/earnings ratios and other value metrics, establishing an average and applying it to the company in question. This is clearly a very inaccurate way of assessing value, in part because the market can either undervalue or overvalue companies. It is also difficult to estimate what the multiples difference between similar companies is due to company-specific factors. The second market valuation method is similar to the use of comparable assets. This approach is based on sales analysis of similar properties and indicates full cash value by analyzing recent sales or asking prices from similar companies. If similar transactions are not similar to the subject business, the selling price of the comparable property will be adjusted to reflect the difference with the subject business. In our example, a power plant can be valued using the market valuation method. Using the market approach may involve looking at a recently built base in the same market, rather than looking for deals that are likely to be few and far between. If there are no comparable properties on the market, a facility under construction or approved for construction can be used for comparison. Just as in real estate appraisals, comparative bases must be adjusted to reflect differences from the basis you are trying to value. For example, in a property appraisal, if you use a comparable 3 bedroom home and the property being appraised has 2 bedrooms, the sale price of the comparable home will be adjusted. for an extra bedroom. The same principle applies to power plants. Property can take on another life; Government regulations and the evolving environment have a major impact on value. For example, if the facility is being valued as coal-fired, there may be environmental or regulatory concerns that could potentially make coal-fired power generation economically unfeasible. There are several downsides to the market approach. In many situations, the market may not be active enough to provide comparable property sales data, and there may not be a reliable source to provide independent verification of value. For the valuation of large, complex, income-generating properties, a thorough analysis of similar transactions is complex; Not only are there fewer of these transactions, but information regarding the financial factors influencing buyer decisions in these transactions is not available through public records. These types of transactions typically include the purchase of intangible assets such as trademarks, patents, favorable contracts, trade secrets, and customer relationships. The actual fair value of these assets is not clear to outsiders not involved in the sale. To be useful for comparison purposes, a comparable company’s selling price must determine its value components — tangible versus intangible assets, fixed assets versus personal assets. personal and taxable assets versus non-taxable assets. While the appraiser may allocate values ​​differently, the complexity of factors can make sales a less reliable indicator of business value. And even when all the necessary information is available, the process of adjusting value for comparable and professional companies is subjective, thus introducing an uncertain valuation as shown in Fig. calculated by another valuation technique. For these reasons, the market valuation approach can provide some useful data points regarding the “go up rate” of a similar business at a given time – but in many cases , it will not fully appreciate the actual fair value of the company. However, the market approach is sometimes used as a pricing technique for mergers and acquisitions (M&A). In an M&A transaction, the acquiring company typically expects to achieve some type of business synergies through the acquisition of the business in question and is therefore not interested in determining the exact value of the company. company mentioned when negotiating the purchase. The market valuation method is also one of the widely used valuation techniques in the financial sector. The cost method is based on the logic of the substitution principle. The concept is that rational investors will not pay more for a property than they would for an alternative property with similar utility. For the market approach, there are two potential starting points for cost pricing: reproduction and replacement costs. Reproduction cost is the estimated cost, at current prices, to produce an exact replica of the property in question, using the same materials, engineering and construction, design and quality standards. workmanship, and includes all defects, excess and obsolescence of such property. exact duplicate. Replacement cost is the cost of replacing an existing asset with a new asset of equivalent utility, from a specific date. For obvious reasons, replacement cost makes more sense than the principle of substitution; A wise investor would not choose to copy an existing asset and incorporate outdated, redundant or unused features. Using our example of power plants, if a company is considering purchasing a facility that serves 100,000 people, it won’t pay more for an existing facility than it would to build one. the new facility serves those 100,000 people. The cost of a new facility can be determined by calculating the cost of materials and the cost of construction. The cost of building a new facility that is modern and functionally equivalent will typically be lower than rebuilding an existing facility. New facilities can be built in a cheaper and more efficient way, using the latest building materials and techniques and the latest technology. The new facility will exclude less efficient decommissioning equipment. In addition, the new facility avoids maintenance costs that accumulate to create “ghost assets”—files that exist but are not being used to operational capacity—on the books. The cost will then be adjusted for depreciation to arrive at the current replacement value minus the depreciation of the power plant in question. One advantage of the cost approach is that it is a very solid capital valuation method backed by current market costs and the operating environment. It provides a clear value for tangible assets, because this value is clearly separated from all other assets. Used in conjunction with the income method, the historical cost method allows intangible assets to be valued indirectly. Tangible value is established through the historical cost method less business value is established through the income method; the rest is the value of the intangible asset. On the downside, the cost approach requires a lot of reliable data. It entails calculating the cost of materials, equipment and labor, for example, developing information on the most efficient way to serve 100,000 customers. Finding and developing this information is very data and time consuming. Income assessment method

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