Professional Documents
Culture Documents
Module 1.1 - Valuation Concept
Module 1.1 - Valuation Concept
VALUATION
What is Valuation?
2
What is the Purpose of
Valuation?
3
VALUE
Is the price estimated to be realized in the sale proceed
between a willing buyer and a willing seller.
4
3 Common Types of
Valuation
5
3 Common Types of Valuation
ASSET-BASED
VALUATION
EARNING-BASED MARKET-BASED
VALUATION VALUATION
6
Asset- Based
Focus on the value of a company’s assets, such as inventory,
1
building and equipment.
7
Market- Based
2
This valuation is often used when businesses are being sold or
when investors are trying to assess the riskiness of an investment.
8
Earning- Based
3
Focus on a company’s future earnings potential. And it is used
when businesses are raising capital from investors or banks.
9
VALUATION PRINCIPLE
The fundamental analysis looks at the broad spectrum of driving factors
such as internal financial metrics. Here are the 5 basic principles for
valuation:
Future Profitability
It is the only thing that determines the current value. The price should be based on what a
buyer can expect in future earnings, not just how the business performed in the past. The
past revenue tells about business momentum but we more focus on what’s left over after all
the expenses of running the business have been paid.
10
VALUATION PRINCIPLE
Cash Flow
Insurance or financial service businesses don’t have many tangible assets, so the real value
is in the cash flow generated through clients.
Potential Risk
Simply put, less risk is rewarded with a higher price. The more risk a buyer must assume, the less
they’re willing to pay. The greater the certainty that a percentage of cash flow comes from recurring
cash flow and the sustainability of recurring cash flow will decrease the risk and increase the valuation
price.
11
VALUATION PRINCIPLE
Objectivity vs Subjectivity
There’s an objective review of revenue and expenses but then there’s the subjective view on
understanding what might make one book more valuable than another.
The subjective side might include looking at the deal itself; terms of payment, guarantees,
claw-back clauses, and the seller’s involvement in the transition.
12