VALUE

economic value
The counter-factual method states that the economic value of a business is the
difference between the current global GDP and the hypothetical global GDP if the
business did not exist.
An alternate method of estimating economic value is to only look at the direct
effects of the business on society.

value vs price
The value per share of a company can be calculated by simply dividing the value by
shares outstanding. The market price of a business fluctuates drastically. The
business’ market price is also affected by the state of the overall economy.
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VALUATION
Valuation refers to the process of determining the present and/or fair value of a
company or an asset. Fair value is a broad measure of an asset's worth and is not
the same as market value, which refers to the price of an asset in the marketplace.
It refers to the agreed price between buyer and seller or, in the accounting sense,
the estimated worth of various assets and liabilities. Meanwhile, Net Present Value
(NPV) is the value of all future cash flows (positive and negative) over the entire
life of an investment discounted to the present.
The work of analysts when doing valuation is to know if an asset or a company is
undervalued or overvalued by the market.

reasons to perform a business valuation

-litigation
-exit strategy planning
-buying a business
-selling the business
-strategic planning
-funding
-selling a share in a business

business valuation
It is a critical financial analysis that needs to be done by a valuation expert who
has appropriate qualifications.

financial valuation techniques

-cost approach
-market approach
-discounted cash flow

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VALUATION PRINCIPLES
The determination of the fair economic value of a company or business for various
reasons. Economic value is the value that a person places on an economic good based
on the benefit that they derive from the good and is often estimated based on the
person's willingness to pay for the good.

key principles of business valuation

-The value of a business is defined only at a specific point in time.
The value of a business requires consistent and regular monitoring.

-Value primarily varies by the capacity of a business to generate future cash flow
Historical results of the company’s earnings before the date of valuation are
useful in predicting the future results of the business under certain conditions.
Additionally, cash flow in this principle is the true determinant of business
value.
-The market commands what the proper rate of return for acquirers is
Business owners need to be wary of the market forces to know the right time to exit
that will maximize value.

- The value of a business may be impacted by underlying net tangible assets

this principle of business valuation measures the relationship between the
operational value of a company and its net tangible value.

-Value is influenced by the transferability of future cash flows

Valuable businesses usually operate without the control of the owner. Such a kind
of personal goodwill( huge control of owner) provides very little or no commercial
value and is not transferable.

-Value is impacted by liquidity

If the marketplace has many potential buyers, but there are a few quality
acquisition targets, there will be a rise in valuation multiples and vice versa. In
both open market and notional valuation contexts, more business interest liquidity
translates into more business interest value.

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VALUATION MULTIPLES
financial measurement tools that evaluate one financial metric as a ratio(the
relationship between two or more things) of another, to make different companies
more comparable. It is an easy way to compute a company’s value and compare it with
other businesses. Multiples portray a snapshot of a company’s status rather than
its potential and reflect short-term rather than long-term values.

types

equity multiples
(to acquire minor positions in companies)
-p/e ratio...share price-EPS
-price/book ratio...useful if assets primarily drive earnings... share price-book
value per share
-dividend yield... comparisons between cash returns and investment types... share
price-dividend per share
-price/sales...used for firms that make losses...share price-sales per share

enterprise value multiples

(used when an assessment is needed on a merger and acquisition)
-EV/revenue...slightly affected by differences in accounting
-EV/EBITDAR(Earnings before Interest, Tax, Depreciation & Amortization, and Rental
Costs)...most used in industries in the hotel and transport sectors
-EV/EBITDA(Earnings before Interest, Tax, Depreciation & Amortization)...EBITDA can
be used as a substitute for free cash flows; is the most used enterprise value
multiple
-EV/invested capital...used for capital-intensive industries

methods
(all types of valuation principles are utilized within the two common
approaches/methods to valuation multiples)

comparable company analysis

This method analyzes public companies that are similar to the company being valued.
An analyst will gather share prices, market capitalization, capital structure,
revenue, EBITDA, and earnings for each company.

precedent M&A transactions

This method analyzes past mergers and acquisitions (M&A) for companies in the same
industry, which can be used as a reference point for the company that is being
valued.

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PRECEDENT TRANSACTION ANALYSIS
Precedent transaction analysis is a method of company valuation where past M&A
transactions are used to value a comparable business today or an entire business as
part of a merger/acquisition.

Steps to Perform Precedent Transaction Analysis:

#1 Search for relevant transactions
#2 Analyze and refine the available transactions
#3 Determine a range of valuation multiples
#4 Apply the valuation multiples to the company in question
#5 Graph the results (with other methods) on a football field
The Football field chart is the best way to illustrate the various methods on one
page in a simple way.

“comps” are current multiples that can be observed in the public markets, while
“precedents” include a takeover premium and took place in the past.
differences:
takeover premium, timing, available data

Financial modeling is a financial forecast made for the company by building up its
revenue drivers, margins, cost structure, capital expenditures, and balance sheet
items to determine its unlevered free cash flow.

unlevered cash flow???

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