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Methods of valuation
We are interested in addressing valuation methods and methodologies as one of the most important methods that help to determine fair value, so that decision-makers can make their decisions on scientific grounds, to reduce the risks of results on random or individual decisions.
As known that there is more than one method and methodology for valuating companies or economic institutions, and we will review and monitor the most used methods in practical life.
It is also important in this regard to remember that every method, or methodology has weaknesses, and many researchers, experts and consultants who have applied these methods to valuate companies or economic institutions criticize them, but we can only praise and appreciate the efforts of everyone who contributed and participated in coming up with the evaluation method and methodology.
In general, the valuation is intended to arrive at the real value of the “share” in the joint-stock companies, or the “stakes” in the limited liability companies, or the “rights” in the specialized financing funds, or the “bonds” in issuing debts of all kinds, whether local, regional or international. And the significance of the aforementioned capital units is that it is the unit of capital that expresses property rights, if it is accurately identified and expresses its true value, it is easy to arrive at the real value of the company or economic institution.
the valuation of companies and economic institutions are required for the following purposes:
It is worth noting that there is more than one method for valuating companies and economic institutions – as will be mentioned – and the valuation methodology is determined according to the following:
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As previously mentioned, there is more than one method and for valuation, but we will review the most used methods, be a scientific and practical reference for experts and consultants working at Truth Economic and Management Consulting Company, to choose the appropriate ones for application according to the nature of the project – the company or the economic institution – and below we review the most used valuation methods:
The cost approach, which is not as commonly used in corporate finance, looks at what it actually costs or would cost to rebuild the business. This approach ignores any value creation or cash flow generation and only looks at things through the lens of “cost = value”.
Another valuation method for a company that is a going concern is called the ability to pay analysis. This approach looks at the maximum price an acquirer can pay for a business while still hitting some target. For example, if a private equity firm needs to hit a hurdle rate of 30%, what is the maximum price it can pay for the business?
If the company will not continue to operate, then a liquidation value will be estimated based on breaking up and selling the company’s assets. This value is usually very discounted as it assumes the assets will be sold as quickly as possible to any buyer.
There are many reasons why Business Valuations are important. It is an essential input to many of the decisions that boards, management, regulators, and investors make every day in modern business Such As:
Determining the true value of a business, a process called “business valuation,” is not just important when the owner is looking to sell the company.
To obtain a business valuation, business owners may wish to contract with a professional appraiser to provide an opinion that will be viewed as independent and objective with the IRS. The resulting business valuation then may be used in a variety of planning applications.
Not all the methods adopted internationally can be fit locally; this fact is rarely considered, especially that the problem of estimating the fair value of assets and companies has become one of the most debatable issues in most Arab countries.
Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. An accurate valuation of a closely held business is an essential tool for a business owner to assess both opportunities and opportunity costs as they plan for future growth and eventual transition. It provides either a point-in-time assessment of relative value for an owner or perhaps the price a buyer would be willing to acquire the business.
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The company’s assets include tangible and intangible items. Use the book or market value of those assets to determine your business’s worth. Count all the cash, equipment, inventory, real estate, stocks, options, patents, trademarks, and customer relationships as you calculate the asset valuation for your business.
In this valuation method, we estimate the value of an investment based on its future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. The Discounted Cash Flows Method requires the following analysis – Revenue, Expense, Investment, Capital structure, and Residual value analysis. It values the company considering:
Book value is total assets minus total liabilities and is commonly known as net worth. The book valuation technique is usually used as a method of cross-testing the more common technique of applying multiples to EBITDA, cash flow, or net earnings.
The cost approach is based on the logic of the principle of substitution. The concept is that prudent investors will not pay more for a property than they would for a substitute property of an equivalent utility. As with the market approach, there are two potential starting points for a cost approach to valuation: reproduction cost and replacement cost.
Reproduction cost is the estimated cost, at current prices, to create an exact replica of the subject asset, using the same materials, construction techniques and standards, design, and quality of workmanship, and incorporating all the property’s deficiencies, over-adequacies, and obsolescence are into this exact duplicate.
Replacement cost is the cost to replace an existing property with a new one of equivalent utility, as of a specified date.
Finally, the concept of estimation and determination of fair value is extremely relative and complicated. Accordingly, it is very difficult to arrive at a conclusion whereby an accusation of detriment is hurled or reform is praised. In witness whereof, in order to seek a fair judgment and objective thinking, we have first to ask about the basis and assumptions of evaluation if we really want to safeguard our sold assets.
The Importance of Business Valuation, Truth Economic & Management Consultancy