Business valuation

business valuation, company valuation

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The practical purpose of the business valuation is to provide professional knowledge needed in business management. In the valuation process, we use experience accumulated since 1996. Thanks to it, we are able to better identify the key factors affecting the market value of the valuated entity.

Our practice shows that the business or trademark valuation is the most common application in the M&A processes, transformations and tax optimization.

Michał Krzempek

Professional, free advice

Michał Krzempek – partner
t: +48 602 653 234

m.krzempek@sipex.pl

What are the strengths of SIPEX in company valuation?

Kancelaria SIPEX, taking advantage of the experience of our team, performs valuations at every stage of the company’s life. We carry out valuations of developed companies, start-ups and liquidated entities. We have experience in income approaches, where the value of a company is determined by its ability to generate future income, as well as in asset-based approaches (valuation of assets and liabilities) and market approaches.

Our team consists of specialists in various fields. We are economists with experience in preparing analyses of risks in business transactions (including credit risk). Our team also includes specialists in the field of construction and technical equipment, who have experience in valuations with asset-based methods. We are also court experts.

Our projects in the scope of determining the value of business entities range from small business activities, local companies, to large public and private companies (specialist hospital in Katowice or medical equipment factory in Żywiec).

How does the valuation process looks like?

The purpose of valuation is basic information. All further work depends on it. If, for example, the aim is to sell shares, the market value should be determined, but in case of company liquidation, the value category would be liquidation value. The choice of valuation method also depends on the purpose of valuation.

Information needs are a list of information that is necessary for valuation. It is prepared individually on the basis of specificity of the company being valued. In this process we shall want to obtain knowledge on the business model, finances or market environment of your company. You will receive the list via e-mail and we will assist you in the efficient preparation of your data.

This is already our job. We analyze the submitted data; assess the condition of industry and trends in the economy. We also check the market environment and investigate the competition. We prepare financial data and make an actual valuation.

The result of our work is a valuation report on the company.

The valuation report includes formal and legal part, analysis and actual valuation prepared on the basis of collected data. The report has a clear form, submitted in paper and in an electronic form.

All our services include support. This means that the Client can obtain additional explanations to the valuation at any time.

What do I receive as a part of the company valuation service?

Results of work on the company valuation are presented in the form of valuation report. It contains formal and legal part, industry analyses, analysis of the company and result of the valuation. Information contained in the report is provided in a way that is accessible and easy to analyze. We always indicate the sources of data used.

Finally, in addition to the very value of the valuation object, the Client receives systematic information on their business. This information can be helpful in taking new management decisions.

This valuation service also includes customer support. Each valuation report is prepared in accordance with the Accounting Act and International Valuation Standards Committee (IVSC). The work according to recognized standards gives customers comfort when presenting the valuation before the court or tax authorities.

However, our support begins already at the stage of preparing information for valuation. We support both the collection of historical data, as well as preparation of budgets and projections. All this to ensure that the final report is reliable and convincing.

How do we valuate the business value?

On the basis of specific valuation purpose and collected information, SIPEX Law Firm specialists choose an appropriate valuation method. The most frequently used are income, asset and market based methods.

Income methods are based on the current value principle, in which the value of assets is the value of future expected cash flows from these assets. (1) The basis for valuation is financial projection prepared and the estimated level of company risk.

DCF method is the most commonly used and is based on a forecast of the company’s financial data. The discount factor here is the cost of capital of the company. The general formula of valuation of an enterprise or its organized part using the DCF method may be presented in the form:

Równanie wycena DCF

where:
CFt – expected cash income in subsequent years
r – discount rate
t – subsequent years of the calculation period
n – number of years of the calculation period
ReV – residual value

The valuation process using this method is based on:
– preparation of financial projections and calculation of cash flows
– estimation of discount rate (risk level)
– calculation of residual value (company value after the detailed forecast period)
– estimation of the company’s capital value
– conducting a sensitivity analysis of basic valuation factors
– preparation of the valuation report

[1] Szablewski A., Tuzimek R. (ed.), Valuation and management of the company’s value, Poltext, Warsaw 2005.
[2] Jaki A. Valuation and shaping the company’s value, 4th edition extended, Wolters Kluwer Business publishing house, Cracow 2008.

Asset-based methods are traditional methods of company valuation, where the value is a sum of individual assets of the company. The value calculated in this way is reduced by liabilities. In literature and practice there are four types of property methods:

  • Accounting;
  • Adjusted net assets;
  • Liquidation:
  • Reinstatement

Accounting method

It is the simplest property method. Its advantage is that it does not require a lot of effort. The basis for determining the value in this method is the company’s balance sheet, which should be drawn up on the valuation date. The value is determined by determining a difference between the book value of assets and the sum of book value of current liabilities and long-term liabilities. The main disadvantage of this method is that the book value does not generally equal market value.

Adjusted net assets method

The book value adopted as the starting point is adjusted by revaluation of assets and foreign capital to their market value. The main advantage of this method is the possibility of detailed argumentation of the valuation of individual components, which increases the valuation reliability. This method is based to a large extent on specialist knowledge in the field of valuation of fixed assets, including real estate, valuation of intangible assets, as well as in the field of accounting and economics.

The valuation procedure shall include the following steps:

  1. Determination of the valuated company’s balance sheet,
  2. Carrying out the necessary corrections consisting in updating the data as at the valuation date,
  3. Correction of the value of all assets to their market value,
  4. Correction of the value of liabilities to their market value,
  5. Determination of the company value.

Liquidation method

This method is used in case of total liquidation of the company’s assets. The value determined in this method is the liquidation value. It is obtained by deducting from the proceeds of sale of the company’s assets the costs associated with liquidation of these assets such as: costs of transport, dismantling, severance payments, disposal). It often involves selling assets in a forced form, i.e. where the expected period of exposure of the assets to market is not met in order to obtain the best possible price, but they are offered at a low enough prices so that the assets can be quickly redeemed. The liquidation method is used to obtain the lowest company value under valuation.

Reinstatement method

This method consists in determining the expenditures that an investor would have to incur in order to create a company with very similar assets to the company being valued. Reconstruction of assets differs from substitution in that the former takes into account consumption.

Valuation using the market-based method consists in comparing the valued company to companies with a similar profile of activity, which are listed on the public market, or for which the details of sales transactions are known.

Comparisons are based on market indicators such as P/E (price/net profit), P/BV (price to book value), P/S (selling price) or EV/EBITDA (value of equity to operating profit with depreciation).

More technically, the market-based valuation method consists in estimating the enterprise’s value or its organized part by calculating the product of valuation base multiplied by a market multiplier.

In what situations is the company valuation useful?

Our practice shows that the need for company valuation occurs most often during:

  • purchase/sale transactions (mergers, acquisitions, withdraw/joining a partnership)
  • restructuring and transformation of the form of conducted separation activity of the Organized Enterprise Part
  • liquidations
  • financial reporting processes (e.g. impairment tests, determination of fixed asset value)
  • tax optimization (e.g. valuation of trademarks and other intangible assets)
  • prepared liquidation of the so-called pre-pack
  • private-investor test
  • lawsuits

What exactly are the services provided by Kancelaria SIPEX?

Below is a list of services:

  • valuation of the enterprise value, report, organized part of the enterprise
  • valuation of company shares, valuation of company value, valuation of shares in a limited liability company
  • valuation of trademarks, brands, intangible assets (including know-how, trade contracts, patents and others)
  • valuation of financial instruments, futures and options contracts
  • balance sheet valuation of assets and liabilities

Najczęściej zadawane pytania (FAQ)

How long the valuation process will last depends on the complexity of the valuation and can last from two to several weeks. In this aspect, we always try to agree on a convenient date for submitting the report, which is why we plan the next stages of work at the very beginning.

The price of the valuation report depends on several factors:

  • the size of the enterprise
  • applied methodology

The size of the enterprise

A larger enterprise usually has more dependencies, industry conditions and more information to analyze, and hence a higher valuation cost.

Applied methodology

The choice of one of the methods described earlier results in a different amount of work needed to estimate the value of the company. In the case of property methods, the quantity and technological level of fixed assets are of great importance. Valuation of fewer simple fixed assets will be less time-consuming than the valuation of a large production plant using modern technologies.

More information can be found in our guide.

If you need general information, you can use the investopedia page:

https://www.investopedia.com/terms/b/business-valuation.asp

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