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International Valuation

Guidance Note No. 6


Business Valuation
(Revised 2005)

Definition

Definition
Business Valuation –
“The act or process of arriving at an
opinion or estimation of the value of a
business or entity or an interest therein.”
(IVS, 7th Ed.)

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Purpose

Purpose

• Assist in the course of rendering or using


Business Valuation (BV). (6.2.1)
• Aid in the establishment or restatement of
financial statements. (6.4.1)

Guidance

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Guidance
• If market value is required, apply IVS 1
(6.5.1.1)
• Otherwise, Valuer is to clearly identify the
type of value involved (6.5.1.2)
• Departures from IVS and GN 6 are to be
disclosed (6.5.2)
• Requirements for Valuation Reports are
addressed in the IVS Code of Conduct
and IVS 3 (6.5.2)

MARKET VALUE
“Market value is the estimated amount for
which an asset should exchange on the
date of valuation between a willing buyer
and a willing seller in an arm’s-length
transaction after proper marketing wherein
the parties had each acted knowledgeably,
prudently and without compulsion.”

Market Value
• Most involve willing buyer and willing seller
• Value is stated in terms of cash (PhP) at time of close
• Does not regard to costs of sale or purchase and without
offset for any associated taxes
• Full disclosure of facts
– Consider the strengths and weaknesses of the
business
– Consider the dynamics of the business
• No single approach to value is perfect
– Valuation is hypothetical unless it is supported by a
recent transaction

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IVS and IAS Differences
• Valuers value ownership not the assets
themselves
• Definition of Depreciation
• Market Value and Fair Market Value

CODE OF CONDUCT
• Ethics
– High standard of honesty and integrity
– Not detrimental to
• their clients
• the public
• their profession
• their professional valuation body
• Competence
– A business valuer must have the
• knowledge,
• skill and
• experience
to complete the assignment
• efficiently
in relation to an
• acceptable professional standard
– IVS 2005, etc.

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Guidance
• Valuer to take steps to ensure all data
sources are appropriate and reliable
(6.5.3)
• Where services of other professionals are
employed, Valuer is to take verification
steps (6.5.4.1) or disclose if none was
undertaken (6.5.4.2)
• Cite clients as source of information, if
ever, used in the Valuation Report (6.5.5)

Qualification Requirements For


Valuers For Business Valuation

“Although many of the principles, methods


and techniques of Business Valuation are
similar to other fields of valuation, business
valuations require special education,
training, skills and experience.” (6.5.6)

The Business Valuation Process


I. Definition of the Problem
II. Preliminary Analysis, Data Selection
and Analysis
III. Approaches to Value
IV. Reconciliation of Value Indications
V. Report Preparation

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Approaches And Methods In
Business Valuation
1. Market Approach
– Comparable Companies Analysis
– Comparable Transactions Analysis
– Accretion/(Dilution) Analysis (specific to each
publicly traded buyer)
2. Income Approach
– (Direct) Capitalization of Income
– Discounted Cash Flow (“DCF”) Analysis
3. Asset-based Approach
– Fair Market Value
– Orderly Liquidation Value
– Distressed Liquidation Value

DISCOUNTED CASH FLOW ANALYSIS


(DCF)
The Methodology:
An earnings stream is projected over a period of years and discounted to present value

5 -Year Projections Balance Sheets


Based on Realistic Income Statements
Assumptions Statement of Cash Flow

Net Present
Value of Yearly Year 1 + Year 2 + Year 3 + Year 4 + Year 5
Cash Flows

Terminal Value Value of the


+ = Company

ANALYSIS AND ADJUSTMENTS


Potential Adjustments
Control premium
Minority discount
Lack of marketability discount
Key person / customer /supplier

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SAMPLE ADJUSTMENT
Applying Marketability and Minority Discounts

Equity Value
($000)
Unadjusted Value Chosen $7,000

Less 33% Marketability Discount (2,333)


Non-M arketable Control Value $4,667

Less 33% Minority Discount (1,556)


Non-M arketable M inority Value $3,111

Reconciliation Process
The conclusion of value shall be based
upon (6.5.15) –
• The definition of value
• The purpose and intended use of the
valuation
• All relevant information as of the valuation
date
• The value estimates from the valuation
methods performed

Conclusion Of Value
• Value of the Company or business interest must
be determined by giving due consideration to the
outcomes of each approach
• The appraiser may consider assigning weights
to the various methods or decide to use only one
approach
• The applicability of valuation discounts such as
the minority (lack of control) discount and
marketability (liquidity) discount in order to arrive
at the valuation conclusion have to be
considered

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Business Valuation Report
TABLE OF CONTENTS

I. TABLE OF CONTENTS 1
II. INTRODUCTION 1
III. EXECUTIVE SUMMARY 6
IV. ECONOMIC SUMMARY 7
V. LOCAL/REGIONAL ECONOMIC PROFILE 12
VI. INDUSTRY SUMMARY 13
VII. FINANCIAL STATEMENTS & ADJUSTMENTS 16
VIII. THE FINANCIAL CONDITION OF THE COMPANY 32
IX. APPRAISAL CONCEPTS 40
X. ASSET APPROACH TO VALUE 46
XI. MARKET APPROACH TO VALUE 48
XII. INCOME APPROACH TO VALUE 54
XIII. REACHING A CONCLUSION OF VALUE 63
XIV. PRICE JUSTIFICATION AND REVIEW 67
XV. PREMIUMS AND DISCOUNTS 73
XVI. APPRAISER’S CERTIFICATION 74
XVII. FIRM PROFILE 75

Effective Date

“This International Valuation Guidance


Note became effective January 31, 2005.”
(6.6.1)