The Theory Surrounding the Business Valuation

Introduction

A report on business valuation is an essential tool for companies that decide to merge with other companies, acquire other companies, sell some of their shares or when they plan to liquidate their business.

The theory surrounding the Business Valuation has undergone profound changes during the last two decades. Because business valuation can be subjective in nature. It has been a subject of considerable controversy. Until this day, there is no consensus on a particular method of valuation. Consequently, the existence of various standard methods of business valuation give rise to widely differing values. Due to the evaluation dilemma, in recent years, there has emerged growing acceptance of the idea that whenever possible conclusions using one method should be cross-checked for reasonableness against the results of another method.

Quad Valuation Approach

The choice of the valuation approach and methodology is determined by the characteristics of the businesses/assets to be valued, the pattern of historical performance and stability of earnings, the competitive market position, experience and quality of management, the availability of reliable information requisite to the various valuation methods, along with other valuation premises.

At BusinessBOX, we have developed a comprehensive dynamic business valuation approach based on four methods. Our approach analyzes the business value from different angles and produces a more comprehensive and accurate view. We call this approach "Quad Valuation Approach – QVA".

The four methods which address both the quantitative and qualitative sides of the business are:

1. Qualitative Scorecard Method (QSM)
2. Adjusted Net Assets Value Method (NAV)
3. Venture Capital Method (VCM)
4. Discounted Cash Flow Method (DCF)

After calculating the business value under all methods, we assign weights based on the age and nature of the business.

1- Qualitative Scorecard Method (QSM)

The highlight of this method is that intangible assets of early stage companies are the foundation of their future success, thus valuable - just as tangible assets are for established businesses.

2- Adjusted Net Assets Value Method (NAV)

NAV is a term used to describe the value of an entity's assets less the value of its liabilities. Net asset value represents the value of the total equity held by investors or partners and, thereby, represent the net asset value.

Under the adjusted net assets value method, total value is based on the sum of net assets value plus, if appropriate, a premium to reflect the fair values of the recorded assets and liabilities.

Adjusted net asset methodology is mostly applied on businesses where the value lies in the underlying tangible assets and not the ongoing operations of the business.

3- Venture Capital Method (VCM)

The venture capital method is a quick approach to the valuation of companies. It estimates the exit value of the company at the end of the forecast horizon and ignores the intermediate cash flows. Then, the value is calculated based on average values of businesses of the same industry in the region.

4- Discounted Cash Flow Method (DCF)

Discounted cash flow (DCF) is a method whereby the present value of future expected net cash flows is calculated using a discount rate. The discount rate reflects two things:

• The time value of money (risk-free rate)
• A risk premium

Discount rate is generally the appropriate Weighted Average Cost of Capital (WACC), that reflects the risk of the cash flows and for the purpose of WACC derivation. We assume that company's exposure to country specific risk is independent to its size, maturity and nature of its business.

Conclusion

Business valuation is subjective and requires the application of experience and judgment to the given facts to reach an acceptable conclusion.

While there is no single clear-cut answer, a well-designed business valuation process is one that can be justified with reasons and incorporates reasonable values.

All values lie in the future; our approach to business valuation at BusinessBOX is built on the idea that the value of an enterprise depends on its expected profits, cash flows or distributions and the risks associated with achieving those results as well as the value of the intangible assets.

Finally, a company’s past performance cannot be used to determine the future results, they only serve as an aid for estimating the likely pattern for future results.

Businessbox Consultancy Llc (or “Businessbox“) is a one-stop advisory firm under Qatar Financial Center (Qfc).