Do you know how much your business is worth?

Valuing a company is one of our specializations. The determination of value is critical to all business owners/managers, whether they intend to sell, list (on an exchange) or simply continue to operate a business with the greatest financial benefit to its shareholders. This is known as maximising shareholder value and is fundamental to all free enterprise activity.

Osprey Partners use state-of-the-art valuation techniques in deriving company value, based on a detailed understanding of the strategy of the firm and identification of its key value drivers.

The valuation of privately owned small and medium-sized enterprises (SMEs) presents particular challenges, especially in an emerging market context. Unlike large corporations (listed or otherwise), entrepreneurs typically do not have the resources to perform a valuation themselves. The publicly available comparative information that makes valuing large companies easier does not exist on the Romanian market. Information on publicly traded companies is relevant but a discount must be applied to allow for the lack of marketability (liquidity) of privately held equity. In an emerging market, however, even similar quoted companies may not be a good guide to value due to the imperfections in the capital market. Developing economies suffer a further disadvantage: they lack a sufficiently long history of mergers and acquisitions which are an important driver for the need for company valuations. Though most local “evaluators” continue to focus on assets as a guide to business value, virtually all modern valuation methodologies attempt to establish value based on the future expected development of a company.

Valuation - Art or Science?

The underlying rule that governs all valuations is that the value of an enterprise is the price at which a willing buyer and a willing seller agree to exchange, both parties being informed of all relevant facts. The final value at which a transaction occurs often has as much to do with investor sentiment as with quantitative data. Nowhere is valuation an exact science and the uncertainties inherent in the local economic environment confirm this. The different valuation techniques described here can be used to approximate or support a valuation figure. It is generally the case that for a given situation one method or a combination of methods will be more relevant than others. The choice of method will be at the discretion of the valuation professional.

Generally a valuation professional (an investment banker, securities analyst, or corporate finance specialist) will agree with his client how the client wishes to use the valuation to support his negotiating position. Often a range of values is developed. To add to the complexity, a valuation is a dynamic exercise and no valuation should ever be regarded as “final”.

The principal methods used are:

Discounted Cash Flow (DCF) This method calculates the value of a company based on a discount rate applied to its projected cash flows. It uses an integrated financial model developed for the company, based on a specific examination of the company's growth prospects This method, although more complicated to apply, attains greater accuracy because it is the only method that utilizes complete information i.e. cash flows relating to both the income statement and the balance sheet. DCF captures all intangibles by translating them into cash flows. This method is favoured by analysts due to the overwhelming empirical evidence that the market value of a company is strongly correlated to the sum of its (discounted) cash flows.

Market comparables This method estimates the value of a company by examining the share prices of “comparable” or “peer” companies -- using data drawn from stock exchanges or similar transactions involving the purchase and sale of such companies -- relative to common accounting-based variables. Examples of such variables include earnings, cash flows, book values (of equity or of total assets) and sales. Multiples are derived from the relationship between these variables and the known market prices of the peer companies that are then applied to the company being valued.

Balance sheet based If one views a business as a collection of assets, then the balance sheet becomes relevant to the valuation exercise. Asset based valuations provide a crude figure against which other valuations may be compared:

(I) Book Value is the amount by which the asset is reflected in the financial statements. It is the least relevant for valuation purposes because it is based on accounting conventions. The relationship to fair market value is tenuous.
(II) Net realisable value is the value the assets could be sold for. This represents the absolute minimum below which an offer for the business should never be accepted. In liquidation situations this method is relevant and is used.
(III) Replacement cost is the cost of the assets if bought new, or with a similar degree of wear. Variations of the above methods can include "adjusted" net asset values, as required in specific cases – e.g. by privatisation authorities – or break-up values in the case of liquidation. In the latter case, we generally work in collaboration with real estate and fixed asset valuation specialists.