VALUATION CONCEPTS AND METHODOLOGIES MARKET VALUE APPROACH Market Value Approach follows the concept that the value of the business can be determined by reference to reasonably comparable guideline companies for which transaction values are known. The values may be known because these companies are publicly traded or because they were recently sold, and the terms of the transaction were disclosed. The business valuation methods under the market approach that are typically used in professional business appraisals include comparative transaction method/comparative private company sale data method, guideline publicly traded company method and 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 especially 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. If 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 Empirical or Statistical approach generally uses research and database processing in order to come up with conclusion and recommendation. The approach requires references and evidences to support the determination and evaluation. Information may take the form of Sales Data, Financial Performance and other historical information. Trend analysis and benchmarking maybe used to process the information. Tools are also made available to facilitate processing large information. Scanned with CamScannerCera ‘Comparative Private Company Sales Data rmery known as comparative called this as guideline ess sales data. This is an empirical approach. transaction method. Other transaction method or comps This method involves finding out prior transactions (i.e. mergers and acquisitions, divestiture, etc.) of comparable companies. ‘or a majority perspective. Transactions data can be obtained by finding the exact industry of the business under n using the established industry classification jon evidence. A number of publications. c ‘ate information on transactions. Most publ make their databases accessible on the Intemet 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™ Mid Market Comps™ (ValueSource) Mergerstat® transaction would be the one from a very simi industry. If no direct comparison is avai other data might be used after considering their market, product, etc. Transactions data required adjustment for the transaction-specific factors such as non-compete agreement, employment contracts, etc 19 which method to er of value, the size of involving a comparable company. A minority stake should be valued using the guideline public company method after applying proper discounts and adjustments. ‘The advantage of this approach is that source data is reliable and comparable data includes sales of small businesses that can be similar the small business being valued. Although the limitation ofthis (Enns evidence in some data selection, analysis and their financial st Exchange Commission (SEC). Thes Information are also available in Philippine Stock Exchange website at hitosi/iose.com ph In most cases, the stock prices as obtained from a public market businesses. In using , proper adjustments ‘must be made to the benchmarks being used on account of size, capital structure, business life cyce (Le. early stage The advantage of this approach is that there are plenty of transaction data available from the public capital markets, Business sale data limitation of this approach is not be as relevant, business ownershi requires adjustment for lack of marketability of private company ‘ownership interest Prior Transactions Method The prior transaction method involves looking up historical ‘ransactions in securities of the business undervaluation. The ‘Valuation might be for minority stake such ahistorical stock quote from a listed stock exchange or it might be for a majorty stake such a Scanned with CamScanner(Ree eed ‘The advantage ofthis appro: {or valuation, if the data is av ddata, absence of a good data may not enat reliable resuts, sady a good reference is reliant heavily on the is approach to produce 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 mul comparative company anal \dvantage 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 withthe similar operations or in the 3 industry 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 - Eamings Ratio Price - eamings market value per share and the earings per share. It sends the signal ‘on how much the market perceives the value of the company as ‘compared to what it actually earns. P/E Ratio is computed using the formuta: Market Value Per Share P/E Ratio =~ Fornings Per Share To ilustrate, Chandelier Co. is a listed company with the market value per share of Php12.0 and reported eamings per share of Php4.0. (rs Using the equation, the P/E Company can create 3x the: PIE Ratio is also known as PIE Mul determine the value of a company using PIE ratio, management accountants and analysts use PIE of the comparable company. For instance, Jopet Hotels and Leisure is a hos} Based on the income statement of Php7.00 per share. Bas industry, the average PIE 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, purely incorporate the value in the market now. However, the tation of this ratio i that certain values incorporated do not, nt the true value of the company. Hence, further due diligence imperative. ‘Book-to-Market ratio is computed using this equation: Net Book Value Per Share Book to Market Ratio = “Trager Value Per Share Book Value per share can be derived by dividing the net book value to the number of outstanding shares available to common or ordinary. Net book value is the difference of the total assets and the total ies. This represents the claim of the equity stockholders to the any. To illustrate, Chandelier Co. reported a Book Value per share of Php35 and with a market value per share of Php12.50. The Book-to- Market ratio is 2,80 wich is computed as follows: 350 1250 Book to Market Ratio = Scanned with CamScanner(eer Book to Market Ratio = 2.80 1p35 per share that is owned by a its value in the market, the key component of of Financial Position. ‘a book value per share of ity industry average SocheenNafoatle torrie abn ove! tocar Leeda be estimated around Php33 per share [Php33 = Php16.50 / 0.5). eded is the Statement Dividend-Yield Ratio Dividend Yield Ratio describes the relationship between the dividends received per share and the appreciation of the market on the price of the company. Dividend- Yield Ratios also known as dividend multiple. Next to Price Eamings 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 = ser ke¢ Value Per Shave te, Chandelier Co. 1nd their market the foregoing, the dividend lared and paid dividends of Php1.50 pet share is Php12.50, Based on Id ratio is 0.12 computed as follows: Dividend Per Share DYR = Tarket Value Per Share Php1.so Phpi2s0 byR = DYR = 0.42 This means that for every Php 1.50 dividends they pay into 12% of the market value of the equity. Using this comparable company analysis, DYR will works as a multiplier to the dividends per share declared by the company. Snares ‘Suppose that Jopet Hotels and and the average dividend mult market value per share can be est share [Php31.91 = Php1.s0 / 0.047 Php1.5 per share lustry is 0.047. The ated to be around Php31.91 per EBITDA Multiple EBITDA or Eamings Before Interest, Taxes, Depreciation and Amortization represents for the net amount of revenue after deducting ‘operating expenses and before deducting financial fixed costs, taxes land non-cash expenses. Given the components, EBITDA can serve ‘asa 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, EBITDA Multiple is determined by this equation _ Market Value per Share EBITDA Multiple = EBITDA per share is derived by dividing EBITDA by outstanding share for common equity or ordinary shares. To illustrate, Chandel reported EBITDA per share of Php8 and the market being Php12.0. Given the equation the EBITOA Multiple is 2 [2 = Php12.0 + Pnp6.0} he firm to the market is 2x for every peso incorporate costs relative to other quantified risks. This is done by 18 or recognizing contingent expenses to generate a more conservative EBITDA results which will serve as driver for the value of the market, strate, Jopet Hotels and Leisure reported an EBITDA muttiple of pper share. The average EBITDA multiple of the hospitality {is 3.5. Given the foregoing, the value ofthe equity is about Php29.76 [Php29.75 = Php8.60 x 3}. To ilustrate further, italso assumed that will have to procure insurance "and security costs to protect the plant assets of the company. This is ‘about Php0.5 per share, Given this additional information on the Scanned with CamScanner( Ranresare camer foregoing, the value of equity is Php28.0 [Php28.0 = (Phpé.5o — Php0.50) x 3.5]. You may note that the value of the firm decreased by Php1.75 [Php1.75 = Php29.75 — Php28.0] after the risk management cost is incorporated. In summary, comparable company analysis uses tools to enable the ‘comparison between compar in 3 ~ Strategy, Structure and Size. The objective is to enable the analyst or management the company based on the behavior of sses 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: EBMOR Mile Divend Map BooktoMarkat P/E Rao 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 professional ers which uses Hei method. In this method, is use business pricing developed based on the ‘expert opinion of professionals involved in business sales. The best-known professional group that does this isthe business intermediaries that broker Business sale transactions in specific industries. Their knowledge of the (Ene marketplace and direct exposure to transactions puts these experts in an excellent position to estimate the likely business selling price. of this appr fe market pa However, since these are based on exper's opinion, pricing mul not be sufficiently backed by rigorous statistical analysis. There wil 'y of information for non-brokered business deals. les may bea Scanned with CamScannerATUL setae ze. ETHODOLOGIES Empirical Statistical approaches has 3 methods which are dependent on the sources of comparable data: Comparative private company sale data, Guideline public company data and Prior transactions method Comparable company analysis is used to determine that value by comparing an asset to the performance of the similar company or at least the industry where that asset belong. To calculate value or price of a company, in simple terms, uses pricing multiple derived from a particular financial ratio of the company or average of similar companies where the subject company is being compared. ‘The comparable company analysis applies P/E Ratio, Book to Market Ratio, Dividend Multiple and EBITDA Multiple. P/E Ratio defines the relationship between the market value per share and earning per share Book to Market defines the relationship between the book value per share and the market value per share. Dividend Multiple or Divided Yield Ratio provides for the relationship between dividends per share and market value per share EBITDA Multiple establishes a multiplier to determine the equity price based on EBITDA or Earnings before interest taxes depreciation and amortization. Heuristics uses Heuristic pricing model which uses expert opinions of professional practitioners. Scanned with CamScanner