Tag - valuation

March 2021

Business valuation

Methods of valuation

Methods of valuation

 

Introduction:

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:

  • Increasing the capital.
  • Reducing the capital.
  • Merging.
  • Acquisition.
  • Entering a strategic investor.
  • According to the financial and accounting policies that companies and economic institutions follow when preparing their annual financial statements … etc.

It is worth noting that there are more than one method for valuating companies and economic institutions – as will be mentioned – and the valuation methodology is determined according to the following:

  • The nature of the company or institution to be evaluated.
  • The availability of quality data and information on which each methodology and method are based.
  • The purpose of the evaluation. The capital increase or decrease, the entry of a strategic partner. etc.
  • The most commonly used valuation methods and methodologies

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As previously mentioned, there are more than one method and for valuation, but we will review the most used methods, to 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:

  • Using the rate of discounting future cash flows after it has been determined based on the components of the discount rate.
  • Using the “WACC” methodology as a discount rate for future financial flows.
  • Using the Capital Asset Pricing Model “CAPM” methodology.

More 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.