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BUSINESS VALUATION
INTERNATIONAL VALUATION
STANDARDS COMMITTEE
A.
B.
I. INTRODUCTION
What is being appraised?
Definitions of Value.
"Fair Market Value" usually the standard of value in the United States of America. It is well defined. "Market
Value", as defined in real property and by IVSC, is the same as Fair Market Value in business appraisal.
Fair market value is considered to represent a value at which awilling buyer and a willing
seller, both beinQ informed of the relevant facts about the business, could reasonably conduct
a transaction, neither person acting under the compulsion to do so.
Although not stated in the definition, it assumes: 1) a cash value; 2) both parties can perform (buyer
has financing and seller has clear title and can deliver); 3) a reasonable time for exposure in the
market; and 4) normal contacts will be signed.
Unusual factors must be explained if not valued.
C. Who Performs Business Valuations
Chartered Financial Analyst (CFA) of the Institute of Chartered Financial Analysts
Accredited Senior Appraiser (ASA) of American Society of Appraisers in Business Valuation
Certified Business Appraiser (CBA) of the Institute of Business Appraisers
Accredited in Business Valuation (ABV) of the American Institute of Certified Public Accountants.
Chartered Business Valuator (CBV) of the Canadian Institute of Chartered Business Valuators.
II. BUSINESS APPRAISAL
STANDARDS
A. International Valuation Standards - 2003, Guidance Note 6.
B. Uniform Standards of Professional Appraisal Practice (USPAP)
Standards 9 and 10 as well as the Preamble
- Standard 9: In developing a business appraisal, an appraiser must be
aware of, understand and correctly employ those recognized methods
and techniques that are necessary to produce a credible appraisal.
- Standard 10: In reporting the results of a business appraisal, an
appraiser must communicate each analysis, opinion and conclusion in a
manner that is not misleading.
C. American Society of Appraisers Business Valuation Standards
D. Institute of Business Appraisers Business Valuation Standards
III. BUSINESS APPRAISAL
ETHICS - IVS-SixthEdition
This is an extract of IVS. Please use entire IVS.
3.3 A Valuer is a person who possesses the
necessary qualifications, abilities, and
experience to execute a valuation.
The Valuer shall be a person of good repute
who:
- Has an appropriate degree
- Has suitable experience
- Understands recognized methods and techniques
IVS Ethics - Cant.
- Is a member of a recognized national professional
valuation body
- Pursues professional learning
- Follows this Code of Conduct
Ethics:
- Honesty
- Integrity
- Conduct
- Conflicts of interest
~ Confidentiality
- Impartiality
IVS Ethics - Cont.
Competence
- Acceptance of Instructions
-Outside Assistance
- Efficiency and Diligence
Disclosure
Reporting of Values
IV. BUSINESS VALUATION
THEORY
A. The value of a business arises from:
- Assets, either Tangible or Intangible; and
- Cash Flow (different definitions of income)
B. The Phases of Business Value
- Orderly Liquidation is often the least value if the
owner has ability to sell the assets
- As cash flow increases, the value of the business
increases from the liquidating value of tangible assets
to the going concern value of tangible assets
- As cash flow increases further, the value of the
business increases to include the value of specific,
identifiable and non-identifiable intangible assets
VALUE=!(INCOME,ASSETS)
Relationship of Value, Income and Assets
Income Level Value
Liquidation Value
9 8
Goodwill
7
Value in Use
6 5 4 3
Company Value
........
....
2
........
........
.....
........
1
........
10
9
8
V
7
a
6
I
5
U 4
e
3
2
1
........
....
0
....
0
Income
c. The Three Basic Approaches
to Value
1. Cost
- Is a balance sheet focused approach (also called Adjusted
Balance Sheet)
- Based on the premise that a prudent buyer will pay no more for a
property than it would cost to replace with a substitute property
with the same utility -- the principal of substitution
- Concept: Value all the assets of a company, subtract the
liabilities, to arrive at the value of FMV stockholders' equity
- Value of each asset may be derived by using any of the three
approaches for valuing those individual assets
- Assets and company may be valued as a going concern or in a
liquidation scenario
COST APPROACH
FAIR MARKET VALUE BALANCE
SHEET
CURRENT ASSETS
WORKING
CAPITAL
FIXED ASSETS
ASSETS
CURRENT
LIABILITIES
LONG TERM DEBT
LIABILITIES + EQUITY
C.
2.
a)
b)
c)
d)
e)
The Three Basic.Approaches
to Value - Continued
Market
Again, principle of substitution.
Comparison between subject property and similar
properties which have recently sold. Normally either
publicly traded shares of similar companies or
acquisitions of similar companies.
May be either balance sheet or income statement
focused
Value the equity or invested capital of a company
through comparison with the pricing of investment in
companies (often as traded in the stock market)
Generally, is a going concern assumption, not
Iiquidation
C. The Three Basic Approaches
to Value - Continued
3. Income
- Based on theory that the value of any asset is the
present value of expected future benefits to be
derived by the ownership of that asset
- Income statement focused
- Value the equity or invested capital of a company by
deriving the present value of the expected flow of
future economic .benefits
- Generally, is a going concern assumption, not
liquidation
- Generally, may take two forms
Discounted cash flow
Capitalization of cash flow
D. Basic Variables Affecting Value
1. Economic conditions
2. Industry Conditions
3. Business Background and Conditions
Earnings history of the firm
Future earning capacity
Balance sheet
Qualitative factors
4. Risk Assessment
Risk free rates of return
General equity risk
Industry specific risk
Company specific risk
a}
b}
c}
d}
e}
f}
g}
h}
5. Revenue Ruling 59-60
The nature of the business and history of the enterprise
The economic outlook in general and condition and outlook of
the specific industry in particular
The book value of the stock and the financial condition of the
business
The earnings capacity of the company
The dividend-paying capacity
Whether or not the enterprise has goodwill or other intangible
value
Sales of stock and the size of the block to be valued
The market prices of stocks of corporations engaged in the
same or similar lines of business whose stocks are actively
traded in a free and open market, either on an exchange or
over-the-counter
v. STEPS OF AN APPRAISAL
A. Engagement Letter
- Define Assignment
- What is the Written Output
- Due Date
- Fee Arrangement
B. Gather Information
- Subject Company Data
- Economic Data
- Industry Data
- Market Data, Le., Transactions in other companies
C. Analyze Information
- Industry/Economic
- Company Qualitative and Quantitative Analys!s
- Market Data
D.
E
.
Do Valuation Approaches, Reconciliation and Conclusion
Write the report documenting what you have done
VI. DATA GATHERING
A. Economic Data and Analysis
B. Industry Data and Analysis
C. Company Data
D. The On Site Interview
E. Market Data
VII. FINANCIAL STATEMENT
ANALYSIS
A. What is the goal of financial analysis?
- Identify unusual items
- Identify what happened and why it happened
- Identify trends and what caused them
- Identify how the company departs from the
industry norm and why
- Comparison with comparable companies to
assist in selection of appropriate valuation
multiples
VII. FINANCIAL STATEMENT
ANALYSIS - Continued
B. Trend Analysis Over Time - Goal is to identify positive or
negative trends, review past growth or see what is "normal" for
the subject company
1. Five Year Spreadsheet, including latest twelve months
- Income Statement
- Balance Sheet
2. Common Size Spreadsheet
3. Trend of Financial Ratios
- Liquidity and Leverage Ratios
- Profitability and Turnover Ratios
- Return on equity, i.e., Income/Equity
Components of ROE = Profitability x Turnover x Leverage
ROE =Income/Sales x Sales/Assets x Assets/Equity
VII. FINANCIAL STATEMENT
ANALYSIS - Continued
C. Comparative Industry Analysis
- Sources of Comparative Data
Robert Morris Associates (RMA) Annual Statement Studies
Performance Analysis Reports (PAR) prepared by trade
association
Other industry data compiled by trade associations or trade
periodicals
Similar publicly traded companies
- Balance sheet and income statement common size
compansons
- Comparative financial ratios
VIII. ASSET BASED VALUATION
APPROACHES
A. When are they most appropriate
- Start-up operation; no track record as a going concern
- Holding company, for example, owning primarily securities
(publicly traded or closely held) or real properties
- Asset-heavy businesses where the sale of the company would
involve specific assets
- Company contemplating liquidation
B. Book value - equity as stated on the financial
statements
- Advantage - Simple, widely understood
- Disadvantages - The value of assets and liabilities stated at
historical, depreciated cost may bear no resemblance to current
economic value
C. Adjusted Book Value
1. Purpose - To replace cost of assets and liabilities with current
economic value
2. Typical balance sheet adjustments
- Non-operating assets and liabilities such as excess cash and securities,
excess investment property and related obligations
- Uncollectible receivables
- LIFO or current replacement cost inventory adjustments
- Marketable securities
- Unmarketable securities
- Accelerated depreciation
- Real property per appraisal
- Machinery & equipment per appraisal
- Intangible assets like goodwill, non-compete agreement
- terms on debt
- Contingencies such as lawsuit or pension obligations
- Deferred taxes
D. Liquidation Value
1. Orderly or forced liquidation
2. Consult management, auctioneer, P&M
appraiser, and/or real estate appraiser
concerning appropriate liquidating discounts
3. Consider liquidation costs
- Auctioneer's fees and commissions
- Continued fixed cost and administrative costs during
liquidation period
- Legal, accounting and other professional fees
- Taxes payable by the corporation
E. Market Based Asset
Approaches
1. Price/book value - where do similar companies
stocks sell relative to book value
2. Price/adjusted book value
- Conceptually the best asset approach
- Most applicable when assets consist primarily of:
Inventory - LIFO adjustments to market data
Real Property - Publicly traded Real Estate Investment Trusts
(REITs) for market data
Securities - Publicly traded investment companies
- Advantages - Uses adjusted company data and market data
- Disadvantages - Difficult or impossible to get adjusted asset data
for similar companies. Cannot make valid comparisons.
IX. ADJUSTMENTS TO INCOME
GOAL: REACH NORMALIZED OPERATING INCOME
A.Non-operating Items - Remove effect on income
statement of non-operating assets. Examples include:
- Excess real property - adjust for rental income, property taxes,
depreciation, debt service
- Excess cash and securities - adjust for interest income,gain
(loss) on securities
B. Varying Accounting Treatments
- LIFO/FIFO inventory
- Depreciation (tax lives vs. economic lives)
- Capital versus operating lease
- Pension Accounting
c. Non-recurring Items
1. Gain (loss) on sale of assets
2. Bad debts
3. Professional fees
4. Unusual production costs - labor or materials
5. Start-up costs
6. Discontinued operations
7. Unusual revenues - price or volume
D. Discretionary Items
1. Owner's compensation - Salary &
Bonus & "Toys"
2. Indirect owner's compensation -
Pension, profit sharing, commissions,
director's fees
3. Transactions with related parties, for
example, leases for real property or
equipment
4. Unusual perquisites
IX. ADJUSTMENTS - Continued
E. New Circumstances change expected
Income
- Acquisition
- Divestiture
F. Invested Capital (Debt Free) Methods
x. CAPITALIZATION OF
INCOME
A. Variations of "Income"
- Net income after income tax
- Income before income tax (EBT)
- Operating inco-me or earnings before interest and
taxes (EBIT)
- Earnings before interest, taxes, depreciation and
amortization (EBITDA)
- Cash flow =Net income plus non-cash charges such
as depreciation and amortization
-lnvestedCapital methods
- Which measure is most appropriate will depend on
the specific situation
x. CAPITALIZATIONOF
INCOME - Continued
B. Goal is to identify long term estimate of
current operating earning power
- Start with the adjusted income statement
already developed
- Compare this to adjusted budget for next year
or management's longer term forecast(s)
- Based on the adjusted historical and
budgeted future, arrive at your best estimate
of long term earning power
C. Capitalization Rate
A rate to translate income (or expected income) into
value
Definition: Capitalization rate =required rate of return.
(discount rate) minus expected long term growth
Capitalization Rate =Required Rate of Return - Growth
(For All Non-Zero Growth Rates)
Capitalization Rate =Required Rate of Return
Only If Growth Rate is Zero
Value =Expected Income/Capitalization Rate
VaIue = ____
Required Rate of Return less Growth Rate
C. Capitalization Rate -Cont.
2. Required Rate of Return - One of the most important and most
subjective aspects of business appraisal
Goal is to measure the RISK that the mrnected income will not be achieved
- Operating risk
- Industry/Economic Conditions
- Company Characteristics
Stability of Product Demand
Substitute Products
Competition
Manufacturing problems
Labor
Stability of supplies
Management/key people
- Financial Risk
Fixed charge coverage, leverage
Adequacy of working capital
Access to long term capital - debt or equity
C. Capitalization Rate - Cant.
Methods of developing the required rate of
return
- "Build up" method
Risk-free rate (long term government securities)
Equity Risk Premium
Specific risk premium for subject company
(most important but no hard guidelines)
- Market method - what rates are other people. using
who are actively buying and selling. Great
conceptually, but the data is seldom available
C. Capitalization Rate - Cont.
Growth Rate - based on past history and management's
budget. Final decision based on judgment of appraiser
- Assumes growth in perpetuity so conservative rate is necessary
- Common range of long term growth is 4Jb to 1QOJb
- Example of typical capitalization rate for closely held company
Value = Expected Pretax Income
Required Rate of Return Less Growth Rate
Value = Expected Pretax Income/(25
%
- 50/0)
Value = Expected Pretax Income/20o/0
D. Excess Earnings Method
Blending an asset-based and an income-based valuation
methods
- Conceptual Basis - Goodwill (value above adjusted net asset
value) exists for a company only if the expected income exceeds
the return required on the adjusted tangible net assets
- Step by Step Method
Determine adjusted tangible net asset value
Determine required rate of return on adjusted tangible net assets
Determine aggregate dollar return required
Compare required return to expected income
If expected earnings exceed required rate, capitalize "excess"
earnings at a relatively high rate to determine goodwill
Total value of company = adjusted tangible net asset value plus
goodwill
D. Excess Earnings Method
Adjusted tangible net asset value
Expected pretax income
$ 1,000,000
250,000
Required pretax return on tangible net assets = 180/0
Capitalization'rate on excess earnings = 300/0
Expected Return
Less Required Tangible Return
($1,000,000 x 1 8 ~ )
"Excess Earnings"
Capitalization rate on excess
Goodwill
Value Conclusion
Tangible net assets
Goodwill
Total Value
-
-
250,000
180,000
70,000
30%
$ 233,000
$1,000,000
233,000
$1,233,000
XI. DISCOUNTED FUTURE
RETURNS
A. Conceptually the most accurate way to value
any investment
- Defined as the present value of future expected
benefits/returns
- Present value of future returns, discounted at a
required rate of return
- Can assume either returns in perpetuity or some
terminal value. Identical concept to pricing a bond
- Differs from "Capitalization" method in that return is
estimated in each of multiple future periods rather
than using a single measure of income
c. Projecting Future Returns
- Long term forecast based on adjusted historical results &management's budget
- Best measure of return is free cash flow (available for dividends/distributions)
Net Income
Plus Non-cash expenses such as depreciation, amortization, deferred taxes
Minus Capital expenditures
Minus Debt principal payments
Plus/Minus Working capital needs (deficiency or excess)
- Year by year forecast plus terminal value, five to ten year forecast common
FCF = Free Cash Flow
r = Required Rate of Return
Value = FCF
1
+ . FCF
2
(1 +r)1 (1 +r)2
+ + FCFn
(1 +r)n
- Required rate of return is determined as previously discussed. Differing levels of
risk are associated with differing levels of income.
D. Terminal Value
Constant growth (capitalization equation)
Terminal Value = FCFn+1
r-g
No growth (annuity in perpetuity)
Terminal Value = FCF
n
+
1
r
XII. MARKET DATA
APPROACHES
A. Conceptual Basis - Principle of substitution
B. Get "market" multiples for similar companies that have
recently sold or whose shares are actively traded. Multiple
based on:
- Current earnings and/or cash flow
- Historical average earnings and/or cash flow
- Projected future earnings and/or cash flow
- Revenues - key on comparative profit margins
- Volume (revenue)
- Equity or adjusted equity - key on comparative return on equity
C. Make qualitative and quantitative comparisons between
subject company and market data. Assess comparative growth
and risk characteristics. Should pricing mUltiples for subject
company be above, below or similar to the market norms?
XII. MARKET DATA
APPROACHES
D. Sources of Market Data
- Similar publicly traded companies
- Similar acquired companies
- Industry rules of thumb
- Make sure the comparisons are accurate, Le., make the same
adjustments to the market data that were made to the subject
company
E. Summary
- Do proper company analysis and adjustments
- Adjust data of comparables, if appropriate
- Determine appropriate norms for market multiples
- Determine how the company's multiples should differ from the
market norms
XIII.OTHER CONSIDERATIONS
A. Buy/Sell Agreements
B. History of Past Transactions or Offers to Buy
C. Discounts for Minority Interest (or Lack of
Control) and Lack of Marketability
D. Premium for Control
E. Special Attributes of Control
F. Control or Minority Assignment can largely
dictate appraisal methodology
G. Special rights or privileges, i.e., put options,
preferred stock conversion or redemption
features .
XIV. DISCOUNT FOR LACK
OF MARKETABILITY
A. Lack of Marketability Discount:
- What is the impact of law on transfer?
- Facts and circumstance dominate, as usual.
B. Studies:
- Restricted Stock Studies
- IPO Studies
- PV Type Calculations
C. Fair market value of minority shares in a closely
held company would be, on average, 350/0 to 45k
less than the value of minority shares in a similar
company whose shares were actively traded in the
stock market.
DLOM - Qualitative Factors
11. Robert Moroney wrote a second article (Taxes -- The Tax
Magazine, May 1977, Why 2 5 ~ Discount for NonmarketabHity in
One Valuation, 100
%
in Another?)
a) Are dividends being paid?
b) Is management friendly? Honest?
c) How fast is the subject company growing?
d) Degree of control?
e) Is the industry in a favorable competitive s tuation?
f) In there interest in the industry in buying companies?
g) Prevailing mood of the investing public?
h) What is the financial and business risk in the subject company?
i) What are the particular restrictions on transfer of interests?
xv. LACK OF CONTROL
DISCOUNT
(MINORITY INTEREST DISCOUNT)
A. Theory. It is commonly accepted in the field of
business valuation that the per share value of a
controlling interest is worth more than the per share
value of a minority interest. Control is a valuable asset.
With it the investor has the right to control the Board of
Directors which in turn can determine salaries, benefits,
dividends, the sale of assets, the direction of the
company, liquidation, etc. These rights have value and
investors are willing to recognize that value by paying a
higher price for a controlling block of stock than they
would for a minority block of stock.
DLOC - Qualitative Factors
1. What are the disadvantages of lack of control?
2. How much cash does a shareholder get on an
annual basis?
3. How is management runni.ng the company -- good.
for all, or good for one?
. 4. How fast is the subject company growing?
5. What is the financial and business risk in the subject
company?
6. What is the impact of state law on lack of control?
7. Facts and circumstance dominate, as usual.
DLOC - Quantification
B. The opposite of a control premium is a minority interest
discount.
C. Quantification. In the public marketplace the value of control is
quantified when one company offers to buy all (or a majority of)
the shares of another -- a "tender offer".
D. Calculation. In recognition of the value of control the buyer
typically makes a bid for the stock at a price that exceeds the
marketprice existing at the time. This excess is called the
"tender offer premium" and is believed to be an objective
estimate of the value of control.
- Control Premium Example: if a tender offer of $28 is made fora publicly
traded company that is trading at $20 per share, the value of a
controlling interest is $28, the value of a minority interest is $20 and the
premium for control is 40
%
0.35
+
+
L----
0.30 ;--------------'+"---------------------------------______j
0.20
s
i 0.25
';
COl
'C
=--
Price/Sales Ratios
Regression
Runckel
0.15 --------------
0.10
0.05 +-----------
9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%
0.00 +----...,-------.,..------,----,..-----r------r-----.,.----,-------l
0.0%
Profit Margins
CHARTB
Price/Sales Ratios vs. Profit Margins
Price/Sales Ratios
--Regression
Runckel
%
--_.. ~ - ~ ~ ~ - - - - _ . _ ~ - - - , - - - - - - - - - -
/
7
.
- ~ - - - - - - - , . -
-
~
~ ~ ;
--
% 10.0% 20.0% 30.0% 40.0% 50.0% 60 P
1.00
0.80
0.00
O.
(0.20)
0.60
~
0
;:l
"
~
.; 0.40
v.I
G:i
Col
C
~
0.20
Profit Margins
TABLE VI
RUNCKEL DISTRIBUTION, SERVICE AND SUPPLY, INC.
BIZCOMPS ACQUISITION DATA 2002
mI]]NAICS # I SP/REV ~ SDCF/REVISP/SDCF I INVENTORY I BUSINESS TYPE IANN. REV[QE] SALES DATE ISALE PRI % DOWNI TERMS
5046 42144 Distr-Expresso Machines 467 124 8/8/97 200 77 0.43 26.6% 1.61 50
5046 42144 Distr-Food Serv Equipment 385 170 7/31/96 190 23 5 Yrs @11% 0.49 44.2% 1.12 25
5046 42144 Distr-Ice/Juice Machines 564 240 7/31/97 525 100 0.93 42.6% 2.19 30
5046 42144 Distr-Restaurant Equip 260 110 9/30/96 195 51 0.75 42.3% 1.77 0
5046 42144 Distr-Scales 2,391 409 8/1/99 1,350 33 10Yrs@9% 0.56 17.1% 3.30 150
5046 42144 Restaurant Equipment Sales 573 265 8/23/01 390 100 0.68 46.2% 1.47 80
5046 42144 Whsle-Restaurant Supplies 3,640 220 5/1/96 125 54 7Yrs@8% 0.03 6.0% 0.57 400
5046 42144 Whsle-Restaurant Supplies 1,750 210 7/3/97 261 66 0.15 12.0% 1.24 85
5064 42162 Distr-Appliance Parts 890 63 9/30/95 35 80 1 Yr@O% 0.04 7.1% 0.56 150
5064 42162 Distr-Appliances 8,090 500 10/1/99 140 9 10Yrs@8.5% 0.02 6.2% 0.28 1,040
Maximum 8,090 500 1,350 0.93 46.2% 3.30 1,040
Mean 1,901 231 341 0.41 25.0% 1.41 201
Median 732 215 198 0.46 21.8% 1.36 83
Minimum 260 63 35 0.02 6.0% 0.28 0
Gilbert 4,596 393 8.5% 525
SIC = Standard Industrial Classification code that divides all companies into industries
Ask = Asking Price, ($000)
Sales = Sales volume, revenues, ($000)
SDCF = Sellers Discretionary Cash Flow: Pretax profits + owner's compensation + depreciation + interest + perqs + non-business expenses, ($000)
Date = Date the transaction closed
Price = SP = Sales Price, ($000)
% Down = Percent of the sales price paid at closing
Terms = Terms of the note received for the non-down payment portion of the sales price
SP/Rev = Sales Price/Revenues, a type of price/sales multiple that relates the sales price to the revenues of the business
SDCF/Rev = SDCF/Revenues, a profit margin
SP/SDCF = Sales Price/SDCF, a type of price/earnings multiple that relates sales price to the earnings of the business
Inv.= Inventory, ($000)
FFE = Furniture, fixtures and equipment, ($000)
Rent = Rent
Intangibles = Intangible assets, ($000) = Sales Price minus FFE
Value calculated using these ratios does not include current assets or total liabilities
BUSINESS VALUATION
THE EUROPEAN PERSPECTIVE
GEORGE BADESCU - ROMANIA
21 OCT 2003 PEPS/ISM SEMINAR
VALUATION IN EUROPE
1066 in UK valuation for tax purpose
1523 in UK first valuation book
, 1834 in UK first appraisal organization
1868 in UK RICS
1977 in Europe TEGOVOFA "Blue Book"
2000 TEGOVA EVGN-7 "Business Valuation"
2001 FEE "Business Valuation: A Guide for
SME"
21 OCT 2003 PEPS/ISM SEMINAR
EUROPEAN PROFESSIONAL
ORGANIZATIONS
TEGOVA (former TEGOVOFA) - .The
European Group of Valuers Associations
FEE - Federation des Experts Comptables
Europeens
RICS - Royal Institute of Chartered
Surveyors
21 OCT 2003 PEPS/ISM SEMINAR
VALUATION STANDARDS-l
INTERNATIONAL
- IVSC: GN 1 Real Property
- IVSC: GN 5- Business Valuation
- IVSC: GN.. - Valuation of Specialized Trading
Property
EUROPEAN
- TEGOVA: GN 2-Valuations of Special Properties
- TEGOVA: GN 7 - Business Valuation
21 OCT 2003 PEPS/ISM SEMINAR
VALUATION STANDARDS-2
- FEE: Business Valuation: a Guide for Small
and Medium Sized Enterprises
- FEE: Procedure to be followed by Accountants
in valuing an Undertaking as a Going Concern
RICS -Red Book 2003
- GN 1- Trade-Related Valuation and Goodwill
21 OCT 2003 PEPS/ISM SEMINAR
SPECIALIZED TRADING
PROPERTY
A particular class of assets which are
generally bought and sold in established and
active markets as operational business units
having regard to their trading potential
include: hotels, leisure properties, petrol
stations, healthcare properties,permanent
plantations, and other labor-intensive
operations.
21 OCT 2003 PEPS/ISM SEMINAR
VALUATION APPROACH
REAL PROPERTY
- income capitalization
- sales comparison
- cost
BUSINESS
- income capitalization
- market comparison
- asset based
21 OCT 2003 PEPS/ISM SEMINAR
COMPONENTS of
BUSINESS VALUE
Real property: land and buildings
Personal property: trade fixture, fittings,
furniture, furnishings and other equipment
Working capital
Intangible assets:
- location- attached to the real property
- operational- attached to personal property
- personal- attached to ownership
21 OCT 2003 PEPS/ISM SEMINAR
ALLOCATION PROCESS
Market value for whole business
not necessary market value for the
components
principle of contribution
principle of substitution
opportunity cost
21 OCT 2003 PEPS/ISM SEMINAR
BASES of VALUATION
Type of ownership
Market value
Value in use
TEGOVA definitions are the same as Ivse
definitions
21 OCT 2003 PEPS/ISM SEMINAR
HOTEL
BUSINESS and REAL PROPERTY
Sophisticated labor-intensive operating
business which have "real property" as the
single largest investll1ent in their capital
structure
Managell1ent of the hospitality business is the
source and key to generate revenues froll1
which the net incoll1e services the investment
in real estate used by the hotel business
21 OCT 2003 PEPS/ISM SEMINAR
TANGIBLE ASSETS
Real property: land and buildings
personal property: furniture, fixture and
equipment
operating supply: inventory, administrative
supply
cash and similar (net value)
21 OCT 2003 PEPS/ISM SEMINAR
INTANGIBLE ASSETS
Contract related:
- management agreements
- franchise license agreements
- advance reservation contracts
- operating permits and licenses
21 OCT 2003 PEPS/ISM SEMINAR
INTANGIBLE ASSETS
WORKFORCE
- trained workforce in place
REPUTATION
- trade name
- association with firms providing other business
servIces
OTHER
- pre-opening cost
21 OCT 2003 PEPS/ISM SEMINAR
HOTEL VALUATION
The asset based (cost) approach:
- market value of the land
- depreciated replacement cost of the buildings
and land improvements
- depreciated replacement cost of the FF&E
- actual amount of working capital
- value of identified intangible assets-not
goodwill
21 OCT 2003 PEPS/ISM SEMINAR
HOTEL VALUATION
Sales comparison approach
- hotel are essentially dissimilar as location,
operation, quality of the buildings, financing
- numerous adjustments difficult to quantify
- market information is not always available or is
incomplete
- multiples as PAR or POR are merely indicative
21 OCT 2003 PEPS/ISM SEMINAR
HOTEL VALUATION
Income capitalization approach
- direct capitalization method when the hotel
operation achieved a stabilized level
- discounted cash flow method - in every
circumstances and only method for start-ups
most used in practice and reflects the
investor behavior
21 OCT 2003 PEPS/ISM SEMINAR
VALUATION of
the COMPONENTS
Most difficult task
used for:
- accounting
- property taxation
- lease estimation
two approaches:
- income allocation- HVS model
- component asset allocation- "bridge" model
21 OCT 2003 PEPS/ISM SEMINAR
INCOME ALLOCATION
MODEL-HVS
Total revenues/year
minus operating expenses
minus real property reserves for
replacements
minus net income attributable to personal
property (return of and on invested capital)
minus net income attributable to intangibles
21 OCT 2003 PEPS/ISM SEMINAR
NET INCOME from
INTANGIBLES
Management fee
amortization of start-up cost (retumof and
on capital invested)
economic profit (if any)
equal income generated by real property
capitalized by real property r.ate
equal real property value
21 OCT 2003 PEPS/ISM SEMINAR
VALUE ALLOCATION
"BRIDGE" MODEL
Net operating income for business
capitalized by business rate
equal business value
minus FF&E market value
minus net working capital
minus intangibles value
equal real property value
21 OCT 2003 PEPS/ISM SEMINAR
INTANGIBLES VALUATION
break-up method
Management contract/chain affiliation by
capitalization of incremental net income from
rooms revenue
pre-opening organizational and marketing cost by
market comparison
reservation contracts by capitalization of
incremental net income generated
reputation by capitalization of the lease-up period
reduced income
21 OCT 2003 PEPS/ISM SEMINAR
INTANGIBLE VALUATION
direct method
DCF technique
present value of the cash flow for a
stabilized operation
present value of the cash flow untill the
operation is stabilized discounted at a
higher rate
the difference is the value of all intangibles
21 OCT 2003 PEPS/ISM SEMINAR
INTANGIBLE VALUATION
100
90
80
70
w
:E
0
60
0
~
C
w
50
:lI
..J
~ 40
U)
tf.
30
20
10
0
1 2 3 4 5 6
YEAR
III INCOME LOSS
IllI ACWAL INCOME
21 OCT 2003 PEPS/ISM SEMINAR
EUROPEAN VIEW
RICS -ONI:
- exclude personal goodwill
- average competent operator
- established trading potential
VALUATION
- earnings multiplier approach
- DCF method
21 OCT 2003 PEPS/ISM SEMINAR
EUROPEAN VIEW
ALLOCATION
- valuers are reluctant to do it
- preferred method to estimate intangibles is
multiplying the adjusted net profit (1 to 1.75)
- often the intangible generating income is said to
be 50% of total net operating income
- lenders do not require the allocation
21 OCT 2003 PEPS/ISM SEMINAR
CASE STUDY
100 rooms 3 star hotel with restaurant, bar,
conference room and fitness club
easy accessible
good parking facilities
affiliated to Best Eastern chain
no mortgage on it
21 OCT 2003 PEPS/ISM SEMINAR
BASIC DATA
stabilized occupancy -75%
stabilized room rate ==$80
inflation rate ==2.5%
hotels cost of equity capital -14.5%
working capital and FF&E cost of capital
==18%
management fee -5% revenues
21 OCT 2003 PEPS/ISM SEMINAR
HVS MODEL APPLIED
Business net operating income $998,000
FF&E and working capital income =$129,600
Management fee==$50,000
Start-up amortization cost==$195,000
Income to real property $623,400
Capitalization rate==12%
Value of real property=$5,195,OOO
21 OCT 2003 PEPS/ISM SEMINAR
"BRIDGE" MODEL APPLIED
Intangibles valuation (break-up method)
- management contract-$130,000
- pre-opening cost==$460,000
- advanced reservations==$120,000
- reputation-$320,000
- TOTAL==$1,030,000
21 OCT 2003 PEPS/ISM SEMINAR
"BRIDGE" MODEL APPLIED
Intangible valuation (direct method)
- cash flow present value for stabilized operation
discounted at 14.5% rate
-$7,080,000
_. cash flow present value untilloperation is
stabilized discounted at 16% rate
. ==$5,842,000
- total intangibles value==$1,238,000
Reconciliation=$l, 100,000
21 OCT 2003 PEPS/ISM SEMINAR
"BRIDGE" MODEL APPLIED
Total business market value==$7,080,000
FF&E market value-$500,000
Net working capital==$200,000
Intangibles value==$l, 100,000
Real property value-$5,260,000
21 OCT 2003 PEPS/ISM SEMINAR
RESULTS COMPARISON
ALLOCATION INCOME MODEL BRIDGE MODEL
BUSINESS VALUE $7,080,000
FF&E $500,000
WORKING CAPITAL $200,000
INTANGIBLES $1 ,185,000
REAL PROPERTY $5,195,000
$7,080,000
$500,000
$200,000
$1,100,000
$5,260,000
21 OCT 2003 PEPS/ISM SEMINAR
DEBATE CONTINUES
Appraisal Institute held a debate in June
1998 and has a new education (Course 800)
IVSC have prepared an ON Exposure Draft
Many papers in Appraisal Journal (5 in
2001-2002) or presented in conferences
21 OCT 2003 PEPS/ISM SEMINAR
EUROPEAN RESEARCH
RIes will publish in late 2003 an
information paper
new papers (Hutchison a.o.ERES June
2003)
21 OCT 2003 PEPS/ISM SEMINAR
IYSC -NEW GUIDANCE NOTE
Defines "specialized trading property"
explains how it is valued according IVS1
highlights the facts to be considered
insists on "average efficient operator" and
on exclusion of the ''personal goodwill"
guides on "assumptions and limiting
conditions" and other disclosures
21 OCT 2003 PEPS/ISM SEMINAR
OUR DEBATE
impact of the ownership type
real property or intangibles valuation-
which is first
market value or value in use
which model to adopt
21 OCT 2003 PEPS/ISM SEMINAR
CASE STUDY
START-UP SCENARIO Base Year Base +1 Base +2
~
Base +4 Base +5 Base +6
sw-
Base +8 Base +9 Base +10
1 2 3 5 6 7 9 10 11
Number of Rooms 100 100 100 100 100 100 100 100 100 100 100
Occupancy 60.0% 65.0% 70.0% 73.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
Average Rate $ 65.00 $ 73.95 $ 78.08 $ 80.03 $ 82.03 $ 84.63 $ 86.74 $ 88.91 $ 91.13 $ 93.41 $ 95.75
Days Open 365 365 365 365 365 365 365 365 365 365 365
Rooms Occupied 21900 23725 25550 26645 27375 27375 27375 27375 27375 27375 27375
Revenues $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000)
Rooms $ 1,068 $ 1,316 $ 1,496 $ 1,599 $ 1,684 $ 1,737 $ 1,781 $ 1,825 $ 1,871 $ 1,918 $ 1,966
Food $ 374 $ 407 $ 442 $ 468 $ 490 $ 502 $ 515 $ 527 $ 541 $ 554 $ 568
Beverages $ 37 $ 40 $ 44 $ 46 $ 48 $ 49 $ 51 $ 52 $ 53 $ 55 $ 56
Telephone $ 21 $ 24 $ 26 $ 27 $ 29 $ 30 $ 30 $ 31 $ 32 $ 33 $ 33
Rentals and Other Income $ 85 $ 91 $ 97 $ 102 $ 106 $ 109 $ 111 $ 114 $ 117 $ 120 $ 123
Total Revenue $ 1,585 $ 1,878 $ 2,105 $ 2,242 $ 2,357 $ 2,427 $ 2,488 $ 2,549 $ 2,614 $ 2,680 $ 2,746
Departmental Expenses
Rooms $ 320 $ 339 $ 359 $ 375 $ 389 $ 399 $ 409 $ 419 $ 429 $ 440 $ 451
Food & Beverages $ 247 $ 260 $ 274 $ 285 $ 295 $ 302 $ 310 $ 318 $ 326 $ 334 $ 342
Telephone $ 8 $ 9 $ 10 $ 10 $ 10 $ 11 $ 11 $ 11 $ 11 $ 12 $ 12
Rentals and Other Income $ 38 $ 40 $ 42 $ 44 $ 115 $ 46 $ 47 $ 48 $ 50 $ 51 $ 52
Total Departmental Expenses $ 613 $ 648 $ 685 $ 714 $ 739 $ 758 $ 777 $ 796 $ 816 $ 837 $ 857
Departmental Income $ 972 $ 1,230 $ 1,420 $ 1,528 $ 1,618 $ 1,669 $ 1,711 $ 1,753 $ 1,798 $ 1,843 $ 1,889
Undistributed Operating Expenses
Administrative & General $ 119 $ 125 $ 131 $ 136 $ 140 $ 144 $ 147 $ 151 $ 155 $ 159 $ 163
Human Resources $ 32 $ 33 $ 34 $ 35 $ 36 $ 37 $ 38 $ 39 $ 40 $ 41 $ 42
Infonnation Systems $ 32 $ 33 $ 34 $ 35 $ 36 $ 37 $ 38 $ 39 $ 40 $ 41 $ 42
Security $ 32 $ 33 $ 34 $ 35 $ 37 $ 38 $ 38 $ 39 $ 40 $ 41 $ 42
Marketing $ 40 $ 42 $ 44 $ 45 $ 47 $ 48 $ 49 $ 50 $ 52 $ 53 $ 54
Franchise Fees $ $ $ $ $ $ $ $ $ $ $
Transportation $ 40 $ 41 $ 43 $ 44 $ 46 $ 47 $ 48 $ 49 $ 50 $ 52 $ 53
Prop. Oper. & Maintenance $ 71 $ 75 $ 78 $ 81 $ 84 $ 86 $ 88 $ 91 $ 93 $ 95 $ 98
E;nergy Costs $ 55 $ 57 $ 59 $ 61 $ 63 $ 64 $ 66 $ 67 $ 69 $ 71 $ 73
TotalUDOEs $ 421 $ 439 $ 457 $ 472 $ 489 $ 501 $ 512 $ 525 $ 539 $ 553 $ 567
Income Before Fixed Charges $ 551 $ 791 $ 963 $ 1,056 $ 1,129 $ 1,168 $ 1,199 $ 1,228 $ 1,259 $ 1,290 $ 1,322
Fixed Charges
Management Fee $ $ $ $ $ $ $ $ $ $ $
Property Tax $ 32 $ 33 $ 33 $ 34 $ 35 $ 36 $ 37 $ 38 $ 39 $ 40 $ 41
Insurance $ 8 $ 8 $ 8 $ 9 $ 9 $ 9 $ 9 $ 9 $ 10 $ 10 $ 10
Reserve for Replacement $ 82 $ 98 $ 109 $ 117 $ 123 $ 126 $ 129 $ 133 $ 136 $ 139 $ 143
Total Fixed Charges $ 122 $ 139 $ 150 $ 160 $ 167 $ 171 $ 175 $ 180 $ 185 $ 189 $ 194
Net Income $ 429 $ 652 $ 813 $ 896 $ 962 $ 997 $ 1,024 $ 1,048 $ 1,074 $ 1,101 $ 1,128
0 Base Year Base +1 Base +2 Base +3 Base +4 Base +5 Base +6 Base +7 Base +8 Base +9 Base +10
1 2 3 4 5 6 7 8 9 10 11
Number of Rooms 100 100 100 100 100 100 100 100 100 100 100
OCCupancy 75.0% 75.5% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
Average Rate $ 80.00 $ 82.00 $ 84.05 $ 86.15 $ 88.31 $ 90.51 $ 92.78 $ 95.09 $ 97.47 $ 99.91 $ 102.41
Days Open 365 365 365 365 365 365 365 365 365 365 365
Rooms OCcupied 27375 27558 27375 27375 27375 27375 27375 27375 27375 27375 27375
Revenues $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000) $(000)
Rooms $ 2,190 $ 2,260 $ 2,301 $ 2,358 $ 2,417 $ 2,478 $ 2,540 $ 2,603 $ 2,668 $ 2,735 $ 2,803
Food $ 767 $ 790 $ 805 $ 825 $ 846 $ 867 $ 889 $ 911 $ 934 $ 957 $ 981
Beverages $ 77 $ 79 $ 81 $ 83 $ 85 $ 87 $ 89 $ 91 $ 93 $ 96 $ 98
Telephone $ 44 $ 45 $ 46 $ 47 $ 48 $ 50 $ 51 $ 52 $ 53 $ 55 $ 56
Rentals and OtIler Income $ 175 $ 180 $ 184 $ 189 $ 193 $ 198 $ 203 $ 208 $ 213 $ 219 $ 224
Total Revenue $ 3,253 $ 3,354 $ 3,417 $ 3,502 $ 3,589 $ 3,680 $ 3,772 $ 3,865 $ 3,961 $ 4,062 $ 4,162
Departmental Expenses
Rooms $ 657 $ 675 $ 690 $ 708 $ 725 $ 743 $ 762 $ 781 $ 800 $ 821 $ 841
Food & Beverages $ 506 $ 520 $ 532 $ 545 $ 558 $ 572 $ 587 $ 601 $ 616 $ 632 $ 648
Telephone $ 18 $ 18 $ 18 $ 19 $ 19 $ 20 $ 20 $ 21 $ 21 $ 22 $ 22
Rentals and OtIler Income $ 79 $ 81 $ 83 $ 85 $ 87 $ 89 $ 91 $ 94 $ 96 $ 99 $ 101
Total Departmental Expenses $ 1,260 $ 1,294 $ 1,323 $ 1,357 $ 1,389 $ 1,424 $ 1,460 $ 1,497 $ 1,533 $ 1,574 $ 1,612
Departmental Income $ 1,993 $ 2,060 $ 2,094 $ 2,145 $ 2,200 $. 2,256 $ 2,312 $ 2,368 $ 2,428 $ 2,488 $ 2,550
Undistributed Operating Expenses
Administrative & General $ 244 $ 250 $ 256 $ 283 $ 269 $ 276 $ 283 $ 290 $ 297 $ 305 $ 312
Human Resources $ 65 $ 67 $ 68 $ 70 $ 72 $ 74 $ 75 $ 77 $ 79 $ 81 $ 83
Infonnation Systems $ 65 $ 67 $ 68 $ 70 $ 72 $ 74 $ 75 $ 77 $ 79 $ 81 $ 83
Security $ 65 $ 67 $ 68 $ 70 $ 72 $ 74 $ 75 $ 77 $ 79 $ 81 $ 83
Marketing $ 81 $ 83 $ 85 $ 88 $ 90 $ 92 $ 94 $ 97 $ 99 $ 102 $ 104
Francl1ise Fees $ $ $ $ $ $ $ $ $ $ $
Transportation $ 81 $ 83 $ 85 $ 88 $ 90 $ 92 $ 94 $ 97 $ 99 $ 102 $ 104
Prop. Oper. & Maintenance $ 146 $ 150 $ 154 $ 158 $ 162 $ 166 $ 170 $ 174 $ 178 $ 183 $ 187
Energy Costs $ 114 $ 117 $ 120 $ 123 $ 126 $ 129 $ 132 $ 135 $ 139 $ 142 $ 146
Total UDOEs $ 861 $ 884 $ 904 $ 930 $ 953 $ 977 $ 998 $ 1,024 $ 1,049 $ 1,077 $ 1,102
Income Before Fixed Charges $ 1,132 $ 1,176 $ 1,190 $ 1,215 $ 1,247 $ 1,279 $ 1,314 $ 1,344 $ 1,379 $ 1,411 $ 1,448
Fixed Cllarges
Management Fee $ $ $ $ $ $ $ $ $ $ $
Property Tax $ 65 $ 67 $ 68 $ 70 $ 72 $ 74 $ 75 $ 77 $ 79 $ 81 $ 83
Insurance $ 16 $ 17 $ 17 $ 18 $ 18 $ 18 $ 19 $ 19 $ 20 $ 20 $ 21
Reserve for Replacement $ 169 $ 174 $ 178 $ 182 $ 187 $ 191 $ 196 $ 201 $ 206 $ 211 $ 216
Total Fixed Charges $ 250 $ 258 $ 263 $ 270 $ 277 $ 283 $ 290 $ 297 $ 305 $ 312 $ 320
Netlncome $ 882 $ 918 $ 927 $ 945 $ 970 $ 996 $ 1,024 $ 1,047 $ 1,074 $ 1,099 $ 1,128
HOTEL VALUE
START-UP
Value of the Property
Cash Flows for IRR Cales
Total Property
Proof of Value
$(000) IRR
$ 5,841,974 16.00%
Year 0 1 2 3 4 5 6 7 8 9 10
$ (5,841,974)$ 429,000 $ 652,000 $ 813,000 $ 896,000 $ 962,000 $ 998,000 $ 1,022,950 $ 1,048,524 $ 1,074,737 $ 9,439,910
Total Property Present Value
Net Income PV Factor @ Discounted
Year Before D.S. 16.0% Cash Flow
1 $ 429,000 0.862069 $ 369,828
2 $ 652,000 0.743163 $ 484,542
3 $ 813,000 0.640658 $ 520,855
4 $ 896,000 0.552291 $ 494,853
5 $ 962,000 0.476113 $ 458,021
6 $ 998,000 0.410442 $ 409,621
7 $ 1,022,950 0.353830 $ 361,950
8 $ 1,048,524 0.305025 $ 319,826
9 $1,074,737 0.262953 $ 282,605
10 $ 9,439,910 0.226684 $ 2,139,873
Total Property Value $ 5,841 ,974
Year 10 Cash Flow Calculations Year 10 net income of $
plus reversion of $
1,101,605
8,338,304
Reversion Calculations for Proof Year 11 Netlncome of $1129145
capitalized at 13% equals $ 8,685,734
Less: Selling Expenses
Equals: Net sales price $ 8,338,304
HOTEL VALUE
STABILIZED
Value of the Property
Cash Flows for IRR Cales Year
$(000)
$ 7,080,087
o
IRR
14.50%
2 3 4 5 6 7 8 9 10
Total Property $ (7,080,087) $ 882,000 $ 918,000 $ 927,000 $ 945,000 $ 970,000 $ 998,000 $ 1,022,950 $ 1,048,524 $ 1,074,737 $ 9,439,910
Proof of Value Total Property Present Value
Net Income PV Factor @ Discounted
Year Before D.S. 14.5% Cash Flow
1 $ 882,000 0.873362 $ 770,306
2 $ 918,000 0.762762 $ 700,215
3 $ 927,000 0.666168 $ 617,537
4 $ 945,000 0.581806 $ 549,806
5 $ 970,000 0.508127 $ 492,884
6 $ 998,000 0.443779 $ 442,892
7 $ 1,022,950 0.387580 $ 396,475
8 $ 1,048,524 0.338498 $ 354,923
9 $ 1,074,737 0.295631 $ 317,726
10 $ 9,439,910 0.258193 $ 2,437,322
Total Property Value $ 7,080,087
Year 10 Cash FlowCalculations Year 10 net income of $
plus reversion of $
1,101,605
8,338,304
Reversion Calculations for Proof Year 11 Net Income of $1129145
capitalized at 13% equals $ 8,685,734
Less: Selling Expenses
Equals: Net sales price $ 8,338,304
mSallmanns Group
Intangible Assets Valuation
Sallmanns (Far East) Limited
Vincent Chong
1
Types of Corporate Assets
Tangible Assets
Fixed Assets
Current Assets
Liquid Assets
2
Intangible Assets
Goodwill
Trademarks
Patent Rights
Concessions
Documented
procedures
rn Sallmanns Group
What are Intangible Assets
"Assets which do not have physical substance,
but manifest themselves by economic
properties and grant rights and privileges to
their owner."
- adopted from the International Valuation
Standard Committee
mSallmanns Group
3
Definition of Business Valuation
"Business Valuation is the act or process of
determining the value of a business
enterprise or ownership interest therein."
- adopted from the American Society of Appraisers
mSallmanns Group
4
Components of Total Business
Value
Total Business = Tangible +
Value Asset Value
5
Intangible
Asset Value
mSallmanns Group
, Recotds as
Representation of Business
Value
xu
Liabilities
Acquir ed
Intangibles ItXX
eu r r en t
ASSETs
BalanceSheet
FIXED ASSETs Equity
xxx
L---
6
Net Tangible Assets
Business Valuation as a means
to realize Intangible Asset Value
--
Iltclnglbh.:
A ~ s e h
_______ -- J
------ -
-
~ - ~
Valuation
Net Tangible Assets
7
: Intangible
A t
: ... Lsse s
m Sallmanns Group
When is a Business Valuation
required?
Fund raising / IPO
Accounting reference
Public announcement
Sale & acquisition
mSallmanns Group
8
Nature of Intangible Assets
Identify intangible assets separately
Vintage of intangibles
Maintenance of intangibles
mSallmanns Group
9
Applications of Intangible Asset
Valuation
Case: New World Infrastructure (Restructuring)
Intangible assets involved:
- Concession Rights
- Management goodwill
Value realized: HK$10 Billion
mSallmanns Group
10
Applications of Intangible Asset
Valuation
Case: Tsingtao Beer
(Initial Public Offering)
Intangible assets involved:
- Brand name "Tsing Tao"
Value realized: HK$490 Million (1993)
mSallmanns Group
11
Applications of Intangible Asset
Valuation
Case: ExxonMobil
(Acquisition Reference)
E'k0nMobii
Intangible assets involved:
- Marketing assets & management efficiency
Value difference: HK$1.6 Billion
mSallmanns Group
12
Applications of Intangible Asset
Valuation
Case: Media Asia Group
(Sale & Purchase Reference)
Intangible assets involved:
- Film Library (91 titles)
Valuation: HK$85.1 Million
mSallmanns Group
13
Applications of Intangible Asset
Valuation
Case: HC International
(Accounting Reference)
sin = net
t i 1 B ~ M 1
Intangible assets involved:
- Information Database (21 million records)
Valuation: RMB 22 Million
mSallmanns Group
14
Applications of Intangible Asset
Valuation
Case: Storage Provider
(Sale & Purchase Reference)
STORAGEPROVIDER
Intangible assets involved:
- Documented Operational Process
Valuation: US 1.2 Million
mSallmanns Group
15
mSallmanns Group
Equipment Valuation
Sallmanns (Far East) Limited
Mario Maninggo
1
Methods of Valuation
(Strengths and Weaknesses)
The Market Approach
The Income Approach
The Cost Approach
2
Cost Approach Application
Reproduction Cost vs Replacement Cost
"Replacement cost is the current cost of a property with
utility equivalent to the subject property"
"Reproduction cost is the current cost of an exact replica of
the property."
3
Cost Approach Application
Cost Estimates Techniques
- Detailed Estimate
- Cost Indexing
4
Cost Approach Application
Cost Estimates Techniques
- Estimating Costs by Scaling
')
Cost Approach Application
Cost Estimates Techniques
- Other Engineering Methods of Cost
Estimation
6
Cost Approach Application
Sequence of Depreciation
Step 1: Reproduction Cost New Less Excess
Capital Cost = Replacement Cost New (RCN)
Step 2: RCN Less Physical Deterioration =
RCNLPD
7
Cost Approach Application
Sequence of Depreciation
Step 3: RCNPD Less Functional
Obsolescence = RCNPDFO
Step 4: RCNPDFO Less Economic
Obsolescence = Replacement Cost New
Less All Forms of Appraisal Depreciation
8
Depreciation in Cost Approach
Physical Deterioration
Functional Obsolescence
9
Depreciation in Cost Approach
Economic Obsolescence
Where capacity A
capacity B
n
10
rated or design capacity
actual production
exponent or scale factor
Typical Procedure in Plant &
Machinery Valuation
Verif or develo asset list
Confirm or'compile brand, model, serial nD.,
descri tion, confi uration, condition, 'etc.
Note s ecialfeaJures, modifications
Typical Procedure in Plant &
Machinery Valuation
Research new machiner costs