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Definition
Definition
Business Valuation –
“The act or process of arriving at an
opinion or estimation of the value of a
business or entity or an interest therein.”
(IVS, 7th Ed.)
1
Purpose
Purpose
Guidance
2
Guidance
• If market value is required, apply IVS 1
(6.5.1.1)
• Otherwise, Valuer is to clearly identify the
type of value involved (6.5.1.2)
• Departures from IVS and GN 6 are to be
disclosed (6.5.2)
• Requirements for Valuation Reports are
addressed in the IVS Code of Conduct
and IVS 3 (6.5.2)
MARKET VALUE
“Market value is the estimated amount for
which an asset should exchange on the
date of valuation between a willing buyer
and a willing seller in an arm’s-length
transaction after proper marketing wherein
the parties had each acted knowledgeably,
prudently and without compulsion.”
Market Value
• Most involve willing buyer and willing seller
• Value is stated in terms of cash (PhP) at time of close
• Does not regard to costs of sale or purchase and without
offset for any associated taxes
• Full disclosure of facts
– Consider the strengths and weaknesses of the
business
– Consider the dynamics of the business
• No single approach to value is perfect
– Valuation is hypothetical unless it is supported by a
recent transaction
3
IVS and IAS Differences
• Valuers value ownership not the assets
themselves
• Definition of Depreciation
• Market Value and Fair Market Value
CODE OF CONDUCT
• Ethics
– High standard of honesty and integrity
– Not detrimental to
• their clients
• the public
• their profession
• their professional valuation body
• Competence
– A business valuer must have the
• knowledge,
• skill and
• experience
to complete the assignment
• efficiently
in relation to an
• acceptable professional standard
– IVS 2005, etc.
4
Guidance
• Valuer to take steps to ensure all data
sources are appropriate and reliable
(6.5.3)
• Where services of other professionals are
employed, Valuer is to take verification
steps (6.5.4.1) or disclose if none was
undertaken (6.5.4.2)
• Cite clients as source of information, if
ever, used in the Valuation Report (6.5.5)
5
Approaches And Methods In
Business Valuation
1. Market Approach
– Comparable Companies Analysis
– Comparable Transactions Analysis
– Accretion/(Dilution) Analysis (specific to each
publicly traded buyer)
2. Income Approach
– (Direct) Capitalization of Income
– Discounted Cash Flow (“DCF”) Analysis
3. Asset-based Approach
– Fair Market Value
– Orderly Liquidation Value
– Distressed Liquidation Value
Net Present
Value of Yearly Year 1 + Year 2 + Year 3 + Year 4 + Year 5
Cash Flows
6
SAMPLE ADJUSTMENT
Applying Marketability and Minority Discounts
Equity Value
($000)
Unadjusted Value Chosen $7,000
Reconciliation Process
The conclusion of value shall be based
upon (6.5.15) –
• The definition of value
• The purpose and intended use of the
valuation
• All relevant information as of the valuation
date
• The value estimates from the valuation
methods performed
Conclusion Of Value
• Value of the Company or business interest must
be determined by giving due consideration to the
outcomes of each approach
• The appraiser may consider assigning weights
to the various methods or decide to use only one
approach
• The applicability of valuation discounts such as
the minority (lack of control) discount and
marketability (liquidity) discount in order to arrive
at the valuation conclusion have to be
considered
7
Business Valuation Report
TABLE OF CONTENTS
I. TABLE OF CONTENTS 1
II. INTRODUCTION 1
III. EXECUTIVE SUMMARY 6
IV. ECONOMIC SUMMARY 7
V. LOCAL/REGIONAL ECONOMIC PROFILE 12
VI. INDUSTRY SUMMARY 13
VII. FINANCIAL STATEMENTS & ADJUSTMENTS 16
VIII. THE FINANCIAL CONDITION OF THE COMPANY 32
IX. APPRAISAL CONCEPTS 40
X. ASSET APPROACH TO VALUE 46
XI. MARKET APPROACH TO VALUE 48
XII. INCOME APPROACH TO VALUE 54
XIII. REACHING A CONCLUSION OF VALUE 63
XIV. PRICE JUSTIFICATION AND REVIEW 67
XV. PREMIUMS AND DISCOUNTS 73
XVI. APPRAISER’S CERTIFICATION 74
XVII. FIRM PROFILE 75
Effective Date