INTRODUCTION TO VALUATION CONCEPTS, METHODS,
AND VALUATION PROCESS
Learning Objectives
● To introduce the concept of valuation,
● To identify the appropriate valuation techniques,
● To discuss why people need to apply valuation techniques, and
● To discuss the importance of valuation in the Accountancy profession.
Introduction to Valuation
What is value?
- Value refers to the worth of an asset, investment, or company, determined through various financial and economic analyses.
The main valuation approaches:
➔ Intrinsic Value -based on fundamental characteristics; identifying if it’s overvalued, undervalued, or fairly valued
➔ Market Value (based on supply and demand) - Determined by what buyers and sellers agree upon in a transaction.
➔ Book Value - The value recorded on the balance sheet, representing the net asset value of a company.
➔ Liquidation Value - The estimated worth if assets were sold off.
What is valuation?
- A systematic process used to estimate and determine the value of an asset, business, or company based on various quantitative
and qualitative factors.
- It is the estimation of an asset's value based on variables perceived to be related to future investment returns, on comparison
with similar assets, or when relevant, on estimates of immediate liquidation proceeds.
Valuation’s Purpose & Objectives
● Decision-Making: aids in investment choices, mergers and acquisitions, and financial reporting by providing an estimate of
worth.
● Fair Price Determination: establishes a fair exchange price for transactions under mutually agreed conditions.
● Performance Assessment: measures how well a business is utilizing its capital to generate returns.
Overview of Valuation Process
1. Understand the purpose of the valuation.
2. Determine the basis and the premise of value
3. Gather relevant data.
4. Review the historic performance of the business.
5. Determine the future outlook for the business.
6. Determine the valuation approach to use.
7. Arrive at a determination of value.
Different Valuation Techniques
ASSET-BASED VALUATION
This determines value based on a company’s net assets, subtracting liabilities. This is best suited for companies with substantial
tangible assets, such as manufacturing firms, real estate holdings, or liquidation scenarios.
➢ Liquidation Value Method
Liquidation value is the total worth of a company's physical assets if it were to go out of business and its assets were sold. It is
determined through a company's assets, such as real estate, fixtures, equipment, and inventory, excluding intangible assets.
INCOME BASED VALUATION
It is useful when assessing businesses based on their ability to generate future earnings. This is a strong choice for startups, investment
decisions, or acquisitions, particularly when revenue and profitability trends are key factors.
➢ Discounted Cash Flows Method
This method helps to determine the value of an investment based on its future cash flows, which is an estimate.
MARKET VALUE APPROACH
This compares the subject asset or business to similar entities in the market, assessing recent sales or stock prices of comparable
companies. It’s commonly used in real estate, mergers & acquisitions, and investment decisions, among others.
➢ Comparable Company Analysis
The process of comparing companies based on similar metrics to determine their enterprise value.
➢ Precedent Transactions Analysis
Also called “Comparable Transactions Analysis,” and a company valuation method that uses past performance results of a
company to help determine that company's valuation.
Benefits of Applying Valuation Techniques
BENEFITS: IF NOT APPLIED:
Investment & Acquisition Decisions Investments become risky and unreliable
Business Strategy & Growth Businesses make wrong decisions
Financial Reporting & Taxation Financial Reports are inaccurate and illegal
Risk Management & Forecasting Poor risk management and forecasting
Legal & Regulatory Compliance Unfair legal decisions and conflicts
Importance of Valuation in the Accountancy Profession
1. Enhances the reliability of financial statements
a. Accurate and fair presentation of assets and liabilities
b. Improves comparability
2. Supports informed decision-making
a. Strategic management decisions
b. Investment and Divestment Decisions
3. Promotes transparency, accountability, and regulatory compliance
a. Reducing Financial Misstatements and Fraud Risk
b. Ensures compliance with accounting standards and tax regulations
4. Facilitates business transitions and risk protection
a. Business transitions
b. Risk management
