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Business Valuation Training Guide

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This Slideshare presentation is a partial preview of the full business document. To view and download the full document, please go here:
https://flevy.com/browse/business-document/business-valuation-training-guide-3760

DOCUMENT DESCRIPTION

This training guide on business valuations provides an overview of the major valuation concepts and issues. The following topics are covered:

- Valuation methods: DCF and market multiples approach
- Valuation Drivers
- Forecasts
- Discount rate
- Calculating value

A checklist of what to look for in the historical analysis is included with this training guide.

Publicado en: Empresariales
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Business Valuation Training Guide

  1. 1. BUSINESS VALUATION GUIDE
  2. 2. WHAT IS VALUE? 4 Valuations need to: › Be forward looking › Consider risk/reward profile › Identify the asset being valued and its associated earnings The value of an asset is the value of its future earnings stream This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  3. 3. VALUATION DRIVERS 7 Size of Business Management Sector Vulnerability Scarcity Growth Prospects VA L U AT I O N This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  4. 4. DCF DEFINITIONS › Equity value = value of equity in a business › Enterprise value = value of operations and non operating assets › Net debt = debt claims against the business (excluding operating payables), less cash and marketable securities › Ke = cost of equity › Kd = cost of debt › WACC = Weighted Average Cost of Capital. 10 This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  5. 5. EXAMPLE OF FCFF CASH FLOWS 13 EBIT Less: Tax Add: Non-cash items (including depreciation) Less: Working capital Less: Capex F R E E C A S H F L O W T O F I R M This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  6. 6. CHOICE OF MODEL DIVIDE N D DISCOU N T MODEL (DDM) Less robust model than FCFF and FCFE Applied in the valuation of minority interests 16 › Future dividends forecast › Discounts cash flows at ke › Equity value calculated directly This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  7. 7. VALUATION PROCESS – FCFF 19 Forecast period FCF Terminal value Value of operations Non-operating assets Enterprise value Debt and debt-like items Equity value pre DLOM and DLOC Ownership % applied Discount for lack of control Equity value post DLOC Discount for lack of marketability Equity value of subject interestThis document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  8. 8. FORECASTS – INCOME STATEMENT 22 › Not based on IFRS › Adjust out all “funnies” › Sensible grouping of accounts (cut the data to identify trends and “tell the company’s story”) › Must always be reconciled back to management’s numbersThis document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  9. 9. FORECASTS – OPERATING CASH FLOWS 25 REVENUE Consider historical growth rates, customers won / lost, new product launches, price growth, market growth (volume growth) COST OF SALES Consider historical margin trends, fixed versus variable, product mix SUNDRY INCOME Consider sustainability OPERATING COSTS Consider fixed vs variable, step changes, normalising volatile costs, historical relationship with revenues This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  10. 10. FORECASTS – OVERALL REASONABLENESS 28 CALCULATE KEY RATIOS: › Gross profit % › EBITDA % › Net profit % COMPARE TO INDUSTRY NORM This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  11. 11. COMMON MISTAKES › Unrealistic growth assumptions (especially volume growth) › Focus placed on profit instead of cash generation › NWC and capex underestimated › Forecast period not long enough to reduce growth to "normal" level This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  12. 12. COST OF DEBT (KD) 34 › Use company actual cost of debt ONLY if debt recently raised › Weight in accordance with current balances (based on market values) › Calculate after tax cost Kd x (1 – t) This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  13. 13. COST OF EQUITY – RFR TO USE? 37 Yield on local government bond Match bond to investment horizon Bond must be actively traded This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  14. 14. COST OF EQUITY 40 › Observed equity beta’s un-levered using formula: – Asset ß = Observed beta /(1+(1 - t) x D/E) › Asset beta then re-levered using inverse of above formula – Equity ß = Asset beta /(1+(1 - t) x D/E) This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  15. 15. WACC WEIGHTING CHOICES Book values of debt / Equity Actual company debt / equity at market values Target debt / equity structure based on industry average 43 This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  16. 16. CALCULATING VALUE USING DCF APPROACH This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  17. 17. NON-OPERATING ASSETS 49 › Value of non-operating assets added to value of operations to give enterprise value › Typical non-operating assets include: − Cash − Loans receivable − Investment property − Any assets that are not core to the business › Non-operating assets to be included at fair value This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  18. 18. EQUITY VALUE 52 › Following the steps above will give you the value of equity! › If valuing a minority interest, apply further discount at a rate of between 15% and 35%, based on factors relevant to the shareholding: − Presence of a majority shareholder − History of abuse by majority − Dividend history − Shareholders agreement with exit / put option This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  19. 19. › Liquidity discount not applied at all or added into the discount rate › Non-operating assets are omitted or double counted by including income in CF and then adding asset › Inappropriate debt deducted (e.g. Amounts already in NWC) COMMON MISTAKES This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  20. 20. MAINTAINABLE EARNINGS › Historic results used to assess achievability of future forecasts › Identify non-recurring/discretionary expenses › Establish “true underlying profitability” 58 This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
  21. 21. CONCLUSION This document is a partial preview. Full document download can be found on Flevy: http://flevy.com/browse/document/valuation-training-3760
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