/ALUATION CONCEPTS AND METHODOLOGIES Comparative Private Company Sales Data This is an empirical approach. This is formerly known aS comparative transaction method. Other literature ae ae guideline transaction method or comparative business sales This method involves finding out prior transactions te mergers and acquisitions, divestiture, etc.) of comparal panies, Such a transaction might represent either a minority perspective or a majority parepootve, ‘Transactions data can be obtained by finding out the exact industry of the business under consideration using the established industry classification methods and searching valuation databases for historical valuation evidence. A number of publications collect and disseminate information on transactions. Most publications make their databases accessible on the Internet for free on a per-use basis or annual subscription access. Among the most widely used are: «Institute of Business Appraisers (IBA) * BIZCOMPS® + Pratt's Stats™ * Done Deal™ «Mid Market Comps™ (ValueSource) + Mergerstat® An ideal guideline transaction would be the one from a very similar company in the same industry. If no direct comparison is available, other data might be used after considering their market, products, etc. Transactions data required adjustment for the transaction-specific factors such as non-compete agreement, employment contracts, etc. In selecting which method to employ in a valuation assignment, the definition of value, the size of the company being valued and the magnitude of the valuation stake (majority vs minority) are important. A majority stake in a large well-established should be valued relative to either (a) a prior transaction of the same company involving a malony stake or (b) guideline transactions representing a majority valued usiy ta ore company. A minority stake should be Proper discounts and adlusiments Sempany memod after appyira The , . com mran ae ils approach is that source data is reliable and Similar the small busi ludes sales of small businesses that can be usinéss being valued. Although the limitation of thisMARKET VALUE APPROACH Market Value Approach follows the Concept that the value of the business ca in company sale data method, guideline Publicly trad use of expert opinions of professional Practitioners. Market-based business valuation methods are routinely used by business ‘owners, buyers and their professional advisors to determine the business worth. This is Specially so when a business Sale transaction is planned, After all, if you plan to buy or sell your business, it is a good idea to check what the market thinks about the selling price of similar businesses. The market approach offers the view of business market value that is both easy to grasp and straightforward to apply. The idea is to compare your business to similar businesses that have actually sold. lf the comparison is relevant, analysts can gain valuable insights about the kind of price the business would fetch in the marketplace. Analysts can use the market-based business valuation methods to get a quick sanity check of the pricing estimate or use this as a compelling market evidence of the likely business selling price. All business valuation methods under the market approach fall within one or more of the following categories. It is either based on statistics/empirical or heuristics or combination of these methods. Empirical / Statistical Approach erally uses research and database nclusian and recommendation, The nces to support the determination Empirical or Statistical approach gen Processing in order to come up with co @pproach ires references and evide Financial ae Be aL may take the form of Sales Data, Fi jis and Performance and other historical information. Trend Figliogies benchmarking maybe used to process the information. it ii tion. 8Vailable to facilitate processing large informatio!VALUATION CONCEPTS AND METHODOLOGIES marketplace and direct exposure to transactions puts these experts in an excellent position to estimate the likely business selling price. The advantage of this approach is that pricing multiples based on the expert opinion of active market participants is made available. Also, pricing formulas are often relied upon both by practitioners and their client business owners and buyers when pricing a deal t's opinion, pricing multiples may tical analysis. There will also bea However, since these are based on expe! brokered business deals. not be sufficiently backed by rigorous statis' concem on availability of information for non-MUN are foregoing, the value of equiy is Php28.0 [PNp28.0 = (Phn® 50 ~ MP 0.50) x 3.5) You may note that he value of he firm decreased by 1P1.75 [Php 1.75 = Php29.75 — Php26.0] after the risk management cost is incorporated. In summary, comparable company analysis uses tools {0 enable the comparison between companies given the differences in 3s — Strategy, Structure and Size. The objective is to enable the analyst or management @ccountant to determine the value of the company based on the behavior of similar businesses in the industry that more or less captured the risks factors and other micro and macro-economic considerations. In the given illustration we can compare the results generated using comparable company analysis under various tools discussed: ee eee EBITDA Multiple Dividend Multiple Book-to-Market B/ERatio We can say that after using various comparative tools the price of Jopet Hotels and Leisure is between Php29.75 to Php33.00, subject to due diligence. Heuristic pricing rules method Another method may consult and use the expert opinion of professianal practitioners which uses Heuristic pricing rules method. In this method, analysts use business pricing formulas that are developed based on the expert opinion of professionals involved in business sales. The best-known professionel group that does this is the business intermediaries that broker usiness sale transactions in specific industries. Their knowledge of thethat Jopet H Suppose that Jopet Hotels and Leisure declared Phy rage divi . 1p1.5 per share and the average dividend multipie of the similar industry is 0.087 The market value per share can be estim share [PhP81.91 = Phpt.50 /O.047] Oe Mound Php 91 per EBITDA Multiple EBITDA or Eamings Before Interest Amortization represents for the net amount operating expenses and before deducting financial fixed costs, taxes and non-cash expenses. Given the components, EBITDA can serve as a proxy of cash flows from ‘Operating activities before tax. Traditionally, cash flows from ‘Operating activities is computed by collections less payments for operating expenses. Indirectly, EBITDA can be ‘computed from net income plus depreciation and amortization and incorporating working capital adjustments. Taxes, Depreciation and of revenue after deducting EBITDA Multiple is determined by this equation Market Value per Share EBITDA Multiple = ——_—_—** Per Stare EBITDA per share EBITDA per shai derived by dividing EBITDA by outstanding share for common equity or ordinary shares. To illustrate, Chandelier Co. reported EBITDA per share of Php8 and the market value per share being Php12.0. Given the equation the EBITDA Multiple is 2 [2 = Php 12.0 = Php6.0] This means that the value of the firm to the market is 2x for every peso of EBITDA earned. In practice, others adjusted the EBITDA to incorporate costs relative to other quantified risks. This is done by adding more costs or recognizing contingent expenses to generate a more conservative EBITDA results which will serve as driver for the value of the market. els and Leisure reported an EBITDA multiple of ff the hospitality Php8.50 per share. The average EBITDA multiple o industry & 3.5. Given the foregoing, the value of the equity Is about Php29.75 [Php29.75 = Php8.50 x 3} Toillustrate, Jopet Hot d that will have to procure insurance jant assets of the company. This is jis additional information 99 the To illustrate further, it also assume and security costs to protect the pl about Php0.5 per share. Given thes area Book to Market Ratio = 2.0 This means that for every Php35 per share that is owned by stockholder it is 2.8x larger than its value in the market 'f Book-to-Market approach is used for comparable company analysis, the key component of the financial statement needed is the Statement of Financial Position. To illustrated, Jopet Hotels and Leisure reporteg ‘a book value per share of Php16.5 and the hospitality industry average Book-to-Market is 0.5, then the value of Jopet Hotels and Leisure can be estimated around Php33 per share [Php33 = Php16.50 / 0.5] Dividend: Yield Ratio Dividend Yield Ratio describes the relationship between the dividends, feceived per share and the appreciation of the market on the price of the company. Dividend-Vield Ratio is also known as dividend multiple, Next to Price Earnings Multiple, this is also a popular tool because it provides the investors with the value which they can actually get from the company. The Dividend Yield Ratio (DYR) is computed using this equation Dividend Per Share Dividend Yield Ratio = Market Value Per Share To illustrate, Chandelier Co. dectared and paid dividends of Phpt 50 per share and their market value per share is Php12.50. Based on the foregoing, the dividend yield ratio is 0.12 computed as follows: Dividend Per Share DYR = ——___ Market Value Per Share Php1.so DYR = ———__ Phpi250 DYR = 0.12 This means that for every Php1 into 12% of the market value comparable company analysis, dividends. Per share declared 50 dividends they pay it will translate of the equity, Using this as a tool for , DYR will works as a multiplier to the by the company, MeVALUATION CONCEPTS AND METHODOLOG Using the equation, the P/E ratio is 3, 1 Company ean create 3x the value of wi his means that the Chandelier hat it earns, PIE Rati i iS also known as P/E Multiples or Price Multiples. To determine the value of a co mpany using PIE ral accountants and analysts use PIE of the Spo. For instance, Jopet Hotels and Leisure is a hospitality company. Based on the income statement of the company, it reported eamings of Php7.00 per share. Based on the listed companies under hospitality industry, the average P/E ratio is 4.25. With the foregoing information, you can expect that the value of Jopet Hotels and Leisure is Php29.75 per share [Php29.75 = Php7.00 x 4.25} Book-to-Market Ratio Book-to-Market ratio is used to determine the appreciation of the market to the value of the company as compared to the value it reported under its Statement of Financial Position. It may be recalled that the book values of the company are based on historical costs and does not purely incorporate the value in the market now. However, the only limitation of this ratio is that certain values incorporated do not represent the true value of the company. Hence, further due diligence is imperative. Book-to-Market ratio is computed using this equation: Net Book Value Per Share a Netack te Book to Market Ratio = “yerpe¢ Value Per Share iding the net book value k Value per share can be derived by dividing nie nui peer of outstanding shares available to common of ordinary. Net book value is the difference of the total assets and the total liabilities. This represents the claim of the equity stockholders to the company. delier Co. reported a Book Value per share of i te, Chan Pras and with a market value per share of Phpt 2.50. The Book-to- Market ratio is 2.80 which is computed as follows _ 35.0 Book to Market Ratio = +555 meMRT Wale) heed) sedi Dea head lb bedehedeten ‘The advantage of this approach is that itis already a good reference for valuation, if the data is available. Since this is reliant heavily on the data, absence ofa good data may not enable this approach to produce reliable results. Comparable Company Analysis In Financial Management, financial ratios are used as tools to assess and analyze business results. Recall that one of these purposes can be used to determine the value. These financial ratios are P/E Ratio, Book to Market Ratio, Dividend Yield Per Share and EBITDA Multiple. Ratios or multiples are useful tools for doing comparative company analysis. The advantage of having ratios and multiples is that it creates better and relevant comparison knowing that opportunities or investments have distinct drivers of their performance. Comparable company analysis is a technique that uses relevant drivers for growth and performance that can be used as proxy to set a reasonable estimate for the value of an asset or investment prospective. In determining the value using comparable company analysis, the following factors must be considered: Comparators must be at least with the similar operations or in the similar industry Total or absolute values should not be compared Variables used in determining the ratios must be the same Period of observation must be comparable Non quantitative factors must also be considered Price — Earnings Ratio Price - earnings ratio (P/E) Ratio represents the relationship of the market value per share and the earnings per share. It sends the signal on how much the market perceives the value of the company a5 compared to what it actually eams. P/E Ratio is computed using the formula: P/E Ratlo = Market Value Per Share Earnings Per Share jeeeaate, Chandelier Co, js a listed company with the market value re of Php12.0 and reported earnings per share of Php4.0VALUATION CONCEPTS AND Uae telat ey arn ¥ if ee | insutficiont market e/dence in some 1 eqiuite cx B SS : consistent data reporting stants fil data selection, analysis and Guideline Public Company Data Leena Public company method involies identifying listed securities Patan Colaming the stock prica forthe company's thelr fronet: Publicly listed companies (PLCs) are senuired to fe Fecha el Statement electronically with the Securties “and ee een mission (SEC), These filing are public information and Infirriition ate aes as oe wetnite al pga llunen 966 a00.oh at hiips:lipse com, lable in Philippine Stock Exchange website In most cases, the stock prices as obtained from a public market fepresent a minority stake. The advantage of this method lies in the availability of a large set of recent data. However, it might not be very appropriate in valuing early-stage andior small businesses. In using public company data to value private companies, proper adjustments must be made to the benchmarks being used on account of size, growth potential, capital structure, business life cycle (i.e. early stage or maturity), ete. The advantage of this approach is that there are plenty of transaction data available from the public capital markets. Business sale data reporting is generally consistent and reliable and business financial reporting data are readily available. Although it can be noted that the limitation of this approach is that comparison to small businesses may not be as relevant, the data generally involves sales of non-controlling business ownership interest (not the entire company) and data requires adjustment for lack of marketability of private company ‘ownership interest. Prior Transactions Method transaction method involves looking up historical vin securilies of the business undervaluation. The transactions te for minoily stake such ahistorical stock quote from valuation tock exchange of it might be for a majority stake such a a listed $0 tion transaction involving the business. Additional merger anne in selecting prior transactions as a benchmark include cot Oy the transaction, the economic situation at the time of the the transaction, etc The prior ee |