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2018 | Book

Value, Valuation, and Valuer Read chapter Read first chapter

Business Valuation

Theory and Practice

Author: Prof. Marco Fazzini

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book provides an applied theoretical approach to modern day business valuation. It combines elements from both finance and accounting to help practitioners identify the most suitable method for analysis, showing when and how methods can be applied in different contexts and under specific constraints. It describes how business valuation techniques can be applied to calculate value in case of transactions, litigation, IPOs, and the fair value under an IFRS framework.
The purpose of this book is to offer a guideline for the application of an integrated approach, thereby avoiding "copy and paste" valuations, based on pre-packaged parameters and the uncritical use of models. Specifically, an Integrated Valuation Approach (IVA) should be adopted that encompasses, within any specific method, a wide range of elements reflecting the characteristics and specificities of the firm to be valued.
The book is based on the International Valuation Standards issued by the International Valuation Standards Council. Valuation standards allow for an alignment of both the methods and their application, providing a common basis for valuers.

Table of Contents

Frontmatter
1. Value, Valuation, and Valuer
Abstract
Value is not a concept that can be easily enclosed in a universally valid definition and there is no unique measure for it. This chapter focuses on the bases for values and on valuation methods: income-based method, market-based method, and cost-based method. The different types of valuation according to the purpose of the assignment are also examined. The chapter then describes the characteristics expected of valuers, who should not just “apply the formulas”, but also satisfy a broader set of requirements. The valuation report is also discussed, which must provide all the information necessary for a third party to understand how the valuation process took place. Finally, a comparison is made between the main valuation standard setters.
Marco Fazzini
2. Integrated Valuation Approach (IVA)
Abstract
The purpose of this textbook is to offer a guideline for the application of an integrated approach, thereby avoiding “copy and paste” valuations, based on prepackaged parameters and the uncritical use of models. In fact, there is no method where you can just go on automatic pilot and get a consistent result. A method works and provides a correct interpretation of value if the pilot, that is, the valuer, can drive it in the right way. This chapter analyzes the integrated valuation approach (IVA), which is based on three steps: context analysis, analysis of previous financial statements, and identification of the valuation method.
Marco Fazzini
3. Financial Statement Analysis
Abstract
An integrated valuation approach requires that a financial statement analysis be carried out for prior years in order to understand where we come from, to make sure the projected outlook is consistent with what happened in the past, and to identify the most appropriate valuation method. The financial statement analysis comprises two steps: the technical steps and the interpretation step. The technical step consists in acquiring information and in organizing it according to a consistent logic. In the interpretation step a valuer, based on the information provided by the analysis of all ratios, must draw a summary assessment on the company’s “state of health”.
Marco Fazzini
4. Income-Based Method
Abstract
Under an income-based approach, the value of the firm is calculated based on the cash flows the firm will be able to generate in the future. This chapter focuses primarily on the calculation of the expected cash flows (both asset-side and equity-side valuation). It then analyzes in greater detail the discount rate, which aligns the cash flows pertaining to different periods and takes into account their volatility based on the firm’s riskiness; specifically, the weighted average cost of capital (WACC) and the capital asset pricing model (CAPM) are examined. Finally, practical indications are provided for calculating the terminal value.
Marco Fazzini
5. Market-Based Method
Abstract
Under a market-based approach the value of the firm is calculated by comparing it with similar businesses, for which significant and recent indications on price are available. The chapter examines both the comparable companies method and the comparable transactions method, from both an asset-side (EV/Revenues, EV/EBITDA, EV/EBIT, EV/Free cash flow) and an equity-side (P/E, P/BV, PEG, P/Free cash flow to equity) perspective. The application of the market multiple method involves the following steps: selection of peer group; choice of multiple; application of multiple to the target company.
Marco Fazzini
6. The Cost Approach
Abstract
Under a cost-based approach a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction, unless undue time, inconvenience, risk, or other factors are involved. The current value of an asset can be calculated according to two methods: replacement cost method, that is, the price that an entity would pay to replace an existing asset at current market prices with a similar asset offering equivalent utility, and reproduction cost method, that is, the cost of reproducing an asset or property with the same materials and specifications.
Marco Fazzini
7. Intangible Assets Valuation
Abstract
The valuation of intangible assets has become an increasingly relevant topic, both because they significantly influence the value of a firm and because they are frequently negotiated, and, therefore, valued on a stand-alone basis. Three valuation approaches can be applied. The income approach determines the value of an intangible asset by reference to the present value (PV) of future income, cash flows, or cost savings that could be reasonably expected to be achieved. The market approach provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available. The cost approach is based on the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility.
Marco Fazzini
8. Premiums and Discounts in Business Valuation
Abstract
When valuing a business, both the controlling interests and the minority interests must be considered. They may give rise to a control premium, that is, an amount or a percentage by which the pro-rata value of a controlling interest exceeds the pro-rata value of a non-controlling interest to reflect the power of control; discount for lack of control, that is, an amount or percentage deducted from the pro-rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control; and discount for lack of marketability, which should be applied when the comparables are deemed to have superior marketability to the subject asset.
Marco Fazzini
Backmatter
Metadata
Title
Business Valuation
Author
Prof. Marco Fazzini
Copyright Year
2018
Electronic ISBN
978-3-319-89494-2
Print ISBN
978-3-319-89493-5
DOI
https://doi.org/10.1007/978-3-319-89494-2