Module 1:

VALUATION CONCEPT
AND PROCESSES
 01 DESCRIBE THE USE AND
IMPORTANCE OF VALUATION

LEARNING 02 DISCUSS THE IMPORTANCE OF

OBJECTIVES
VALUATION IN ACCOUNTANCY
PROFESSION

03 DISCUSS WHY PEOPLE NEEDS TO

After studying this module, you APPLY VALUATION TECHNIQUES
should be able to:

04 ILLUSTRATE PORTER’S FIVE

FORCES

05 ENUMERATE THE PRINCIPLES AND

PROCESSES IN CREATING VALUE
 Overview
Assets, individually or collectively, has value.
Businesses treat capital as a scarce resource that they
should compete to obtain and efficiently manage.
Growing companies provide long term sustainability to the
economy by yielding higher economic output, better
productivity gains, employment growth and higher salaries.
The fundamental point behind success in investments is
understanding what is the prevailing value and the key
drivers that influence this value.
 FOUNDATIONS Determining The Basis of Value

OF VALUE The basis of value is a consideration of the

type of value being measured and the
perspectives of the parties to a
transaction.
Value is all about how much something is
worth, whether in an estimate or exact
amount. Determining The Premise of Value

Knowing how to measure value or how

The premise of value is determined by the
to create value is an essential tool for purpose for the valuation and the basis of
everybody to be able to make a decision, value. Generally, it will fall into one of the
wise decisions. following categories:

Going Concern Premise

Orderly or Forced Liquidation Premise
 GOING CONCERN
PREMISE
This premise of value assumes continued
use of the business assets and continuing
operation of the company.
 ORDERLY OR FORCED
LIQUIDATION PREMISE
In this valuation premise, the assumption
is that the business assets will be operated or
sold individually or as a group; the company
will not continue operation.
 VALUATION Frameworks for Valuation
It is the analytical (quantitative)
process of determining the current or Conceptual frameworks of
projected worth (value) of an asset or valuation is about the issue of
something.
25K+ There are several what affects or what drives
techniques or methods available to
the value to change.
be used in doing valuation.
CONCEPTS OF
VALUATION
 “A company creates value if and only if
the return on capital invested exceed the
cost of acquiring capital.”

THREE MAJOR
Value in the point of view of FACTORS:
corporate shareholders,
relates to the difference
Current Operations
between cash inflows
Future Prospects
generated by an investment
Embedded Risk
and the cost associated with
capital invested which
captures both time value of
money and risk premium.
Different Concepts of Valuation

GOING CONCERN VALUE

LIQUIDATION VALUE
MARKET VALUE
BOOK VALUE
INTRINSIC VALUE
 The entity will
continue to do its
GOING CONCERN business activities
VALUE into the foreseeable
future.
 Computed based on
the assumption that
entity will be
LIQUIDATION
dissolved, and its
VALUE assets will be sold
individually.
 The price an asset
MARKET would get in the
VALUE marketplace.
 Commonly known as
BOOK net worth (total
VALUE assets minus total
liabilities).
 The real worth of a
company based on its

INTRINSIC underlying
fundamentals, including
VALUE future earnings
potential and cash
flows.
ROLES OF
VALUATION IN
BUSINESS
PORTFOLIO MANAGEMENT

Fundamental Analyst Chartists

persons who are interested in

analyze patterns, trends, and trading
understanding and measuring
volumes to make buy or sell decisions.
the intrinsic value of a firm.

Activist Investors Information Traders

usually do “takeovers” – they use their react based on new information

equity holdings to push old management about firms that are revealed to
out of the company and change the way the stock market.
the company is being run.
VALUATION TECHNIQUES IN
PORTFOLIO MANAGEMENT

A. Stock Selection

B. Deducting Market Expectations

 Analysis of Business
TRANSACTIONS/DEALS
Business Acquisition Merger Divestiture

DEALS

Spin-off Leverage
buyout
 SYNERGY
• Potential increase in firm
value that can be
generated once two firms
merge with each other.

CONTROL
• Change in people
managing the
organization brought by
the acquisition.
VARIOUS
REASONS FOR
PERFORMING A
BUSINESS
VALUATION
 LITIGATION
Process of determining the financial value of
a business or its assets to resolve legal
disputes, such as those involving divorce,
shareholder disagreements, breach of
contract, or damage claims. It provides an
objective basis for settling disputes and
calculating damages or fair compensation.
 EXIT STRATEGY
PLANNING
Process of preparing a business owner for
the eventual sale, transfer, or closure of their
business. Performing a business valuation in
this context helps determine the current
worth of the business, enabling the owner to
make informed decisions about how and
when to exit
 BUYING A BUSINESS

Buying a business is essential to ensure that

the buyer pays a fair price for the business
and understands its financial health and
potential risks
 SELLING A BUSINESS

Selling a business is crucial for setting a fair

and realistic selling price. It ensures the
seller receives an accurate value for their
business and helps facilitate a successful
sale.
STRATEGIC PLANNING

Determining the current value of a company

to inform key decisions and guide future
strategies.
 FUNDING

Determining the company's worth when

seeking financial support from external
sources, such as investors, banks, or venture
capitalists.
SELLING A SHARE IN A
BUSINESS
Determine the appropriate price for the
portion of the company being sold. It
ensures that both the seller and the buyer
have a clear understanding of the company's
worth, which helps in negotiating a fair
price.
Fundamental Principles of
VALUATION/VALUE
CREATION
 THE VALUE OF A BUSINESS IS
DEFINED ONLY AT A SPECIFIC
POINT IN TIME.

Business value changes constantly due to

fluctuating factors like earnings, cash
position, and market conditions. Regular
monitoring is essential since valuations from
previous periods may not reflect the current
true value of the business.
 VALUE PRIMARILY VARIES IN ACCORDANCE
WITH THE CAPACITY OF A BUSINESS TO
GENERATE FUTURE CASH FLOW.

A company's valuation is primarily

determined by its ability to generate future
cash flows, with historical results serving as
predictors under certain conditions.
Business owners must develop
comprehensive future cash flow estimates,
supported by reliable historical data.
THE MARKET COMMANDS WHAT THE PROPER RATE
OF RETURN FOR INVESTORS

Market forces, including industry type,

financial costs, and economic conditions,
dictate the required rate of return for
investors. These market rates provide
important benchmark indicators and
influence long-term investor return
expectations.
 THE VALUE OF A BUSINESS MAY BE
IMPACTED BY UNDERLYING NET
TANGIBLE ASSETS

The relationship between operational value

and net tangible assets can significantly
impact business valuation. Companies with
higher net tangible asset values typically
have higher going concern value due to
better financing security and lower
investment risk.
 VALUE IS INFLUENCED BY
TRANSFERABILITY OF FUTURE CASH
FLOWS

The value of a business is heavily influenced

by how easily its cash flows can be
transferred to potential acquirers. Businesses
that can operate independently of their
owners typically have higher value than
those relying heavily on owner involvement.
 VALUE IS IMPACTED BY
LIQUIDITY

The principle of supply and demand affects

business valuation, where more potential
buyers and fewer quality acquisition targets
lead to higher valuation multiples. Greater
business interest liquidity generally
translates to higher business interest value.
VALUATION PROCESS
Understanding
THE BUSINESS
PORTER’S FIVE FORCES
Importance of
BUSINESS
ENVIRONMENT
ENABLES TO IDENTIFY BUSINESS
OPPORTUNITIES

All changes are not negative.

If understood and evaluated
them, they can be the
reason for the success of a
business. It is very necessary
to identify a change and use
it as a tool to solve the solve
the problems of the business
or populous.
 HELPS IN TAPPING USEFUL RESOURCES

Careful scanning of the business environment helps in tapping the

useful resources required for the business. It helps the firm to track
these resources and convert them into goods and services.
COPING WITH CHANGES

The business must be aware of the

ongoing changes in the business
environment, whether it be changes
in customer requirements, emerging
trends, new government policies,
technological changes. If the business
is aware of these regular changes
then it can bring about a response to
deal with those changes.
ASSISTANCE IN PLANNING

This is another aspect of the importance of

the business environment. Planning purely
means what is to be done in the future. When
the business environment presents a problem
or an opportunity, it is up to the business to
decide what plan would it have to come up
with in order to address the future and solve
the problem or utilize the opportunity. After
analyzing the changes presented, the
business can incorporate plans to counteract
the changes for a secure future.
 HELPS IN IMPROVING PERFORMANCE

Enterprises that are thoroughly scanning their environment not only deal
with the changes presented but also flourish with them. Adapting to the
external forces help the business to improve the performance and survive
in the market.
COMPETITIVE POSITION
refers to how the products, services and the company itself is set apart
from other competing market players.
According to Michael Porter, there are generic corporate strategies
to achieve competitive advantage:

a. Cost leadership – It relates to the incurrence of the lowest cost

among market players with quality that is comparable to
competitors allow the firm to price products around the industry
average.

b. Differentiation – Firms tend to offer differentiated or unique

product or service characteristics that customers are willing to pay
for an additional premium.

c. Focus – Firms are identifying specific demographic segment or

category segment to focus on by using cost leadership strategy
(cost focus) or differentiation strategy (differentiation focus).
Forecasting
FINANCIAL
PERFORMANCE
TWO APPROACHES TO FORECAST FINANCIAL PERFORMANCE

TOP-DOWN FORECASTING APPROACH

– international or national macroeconomic projections with utmost
consideration to industry specific forecasts.
TWO APPROACHES TO FORECAST FINANCIAL PERFORMANCE

BOTTOM-UP FORECASTING APPROACH

– forecast starts from the lower levels of the firm and builds the forecast
as it captures what will happen to the company.
 TOP-DOWN VS. BOTTOM-UP
FORECASTING APPROACH
Aspect Top-Down Forecasting Bottom-Up Forecasting

Begins with macroeconomic trends Starts with internal company data

Starting Point
and industry forecasts. (sales, product-level info).

Macro-economic trends and industry Detailed, company-specific data and

Focus
projections. insights.

Complexity Simpler and quicker. More detailed and complex.

Less credible; often used for quick More credible; relies on actual data
Credibility
estimates. and trends.

Suitable for early-stage or large Ideal for mature companies or those

Use Case
companies with diverse operations. with historical data.

Level of Detail Broad and high-level. Granular and detailed.

Selecting the right
VALUATION
MODEL
 CHOOSING A VALUATION MODEL

a. Characteristics of the Company - The first and most important factor is

the characteristics of the company that is being valued.

b. Characteristics of Investor - It may not seem that obvious, but the

characteristics of the investor also play a big role in which model needs
to be selected for valuation.

c. Purpose of Investment - Lastly, the purpose of investment also plays

a major role in the valuation model being chosen.
Preparing Valuation Model
BASED ON FORECASTS
there are 2 aspects to be considered:

Sensitivity Analysis Situational Adjustments

is a common methodology in For firm-specific issues that affect

valuation exercises wherein multiple firm value that should be adjusted
analyses are done to understand by analysts. In some instances, there
how changes in an input or variable are factors that do not affect value
will affect the outcome (i.e. firm per se when analysts only look at
value). Assumptions that are core business operations but will still
commonly used as an input for influence value regardless. This
sensitivity analysis exercises are sales includes control premium, absence
growth, gross margin rates and of marketability discounts and
discount rates. illiquidity discounts.
Applying Valuation
CONCLUSIONS AND
PROVIDING
RECOMMENDATION
Finally, with the results from the selected valuation methods available,
you can decide what the business is worth. This step in the valuation
process is called the business value synthesis. Since no one valuation
method provides the definitive answer, it is a good idea to combine the
results you got into an overall opinion of value.

WEIGHTING STRATEGY

Approach Valuation Method Value Weight Weight Value

Market Comparative business sales $1,000,000 25% $250,000

Income Discounted Cash Flow $1,200,000 25% $300,000

Income Multiple of Discretionary Earnings $1,350,000 30% $405,000

Asset Asset Accumulation $950,000 20% $190,000

THANK
YOU.