The process of determining the present worth of a company or an asset is termed as Valuation. It is a term in finance and mostly done by a valuer who has an authority. The items that are mostly valued includes liability or an asset like immovable properties.Valuation is needed for many reasons like capital budgeting, for analysis of investments, transactions in merger and acquisitions etc.
How Valuation is done?
The process of determining financial assets depends on three models:
- Absolute Value Models: It determines the present value of assets by determining the expected future cash flows from them. These type of models usually take two forms: Single Period Model or Discounted Cash Flows Model.
- Relative Model: This method determines the value on the basis of market prices of the same type of assets.
- Option Pricing Models: These are used only for some particular type of assets and are very complex form of present value model.
Use of Valuation
The analysis of valuation is required to assess taxes, wills and divorce settlements, analysis of business and accounting. The balance sheet is a good option to value than others in finance. It is difficult to value such financial equipment’s which are partly dependent on the theoretical models.
For professionals working in finance, it is possible to build their own estimate of the valuation done on assets or liabilities in which they are interested. They made calculations on various kinds like analyses of bonds, price to earnings, price to cash flow that have a focus on default risk and levels of interest rates. All these approaches can be thought as of building estimates of value that fight for credibility with the existing bond prices, wherever applicable and may results in selling or buying of participants in market.
Assumptions and Judgments made in the Valuation
- While valuing an asset, there are different circumstances and purposes. These situations leads to different methods for valuation.
- All the methods and models adopted for valuation have a limitation. It differs in relevance to observations, degree to complexity or their mathematical form.
- The inputs to models vary in a significant manner because of some judgments and assumptions.
How to valuate a suffering company
Some adjustments are made to the analysis of valuation whether it is an asset based or market based or the base was income. It is a necessity in some instances like restricted cash, control of premium, non-operating liabilities and assets, market leases, excessive salaries in case of private firms, etc.
The other financial statements include working capital adjustment, cost of goods sold adjustment, deferred capital expenditure and non-recurring professional fees.
Valuation of a Start Up Company
In early 2015, startup companies like Uber valued about $50 billion based on the capital firms of the group venture are interested to pay for the share in the firm. These shares are not listed in the stock market or any valuation based on assets but also on their potential for success, growth and possibility on profits.
Types of Valuation & Appraisals
The equity valuation provides independent appraisal, professional and valuation services to corporations, individuals, banks, financing firms in business, sponsors having retirement plans, trusts. Etc. The fee based valuation services will provide a correct value for the following:
- Financial Appraisal for Business and Valuation
- Divorce Appraisal and Valuation
- Appraisal and Valuation for Limited Liability Company
- Appraisal and Valuation for Limited Partnership
- Appraisal and Valuation for Mortgage Funds
- Appraisal and Valuation for Pension Plans
- Appraisal and Valuation Plans for sharing of Profit
- Appraisal and Valuation for Capital Funds in Venture
Real Estate Appraisal and Valuation
Property Valuation, Land Valuation or Real Estate Appraisal, all are the process of creating an opinion about the value of existing property or market value. The transactions in real estate often requires valuation because each property is unique in the process of valuation especially according to their location. Unlike of the stocks of corporate which are traded and almost same. These reports were made by the appraisals on the basis of mortgage loans, taxation, settling disputes of divorce and so on.
Type of Value
The real estate value and appraisals are of several types. Some of them are:
- Market Value: The price at which an asset can take a stand in the competitive market. This estimated amount of the liability or an asset can be the reason for trade in the competitive market between the willing buyer and seller.
- Use Value or Value in Use: The value of cash flow that is generated for the particular owner under a specific use is known as the Net Present Value. It is the value for only one user and can be above or below the market value of that property.
- Investment Value: The value for the particular investor only and can or cannot be higher than the market value of the same property. The difference between the investment value and the market value gives the motivation to step in the market.
- Insurable Value: The value of an existing property that can be covered by the insurance policy.
- Liquidation Value: It is a value related to the proceedings of bankruptcy.
Price vs. Value
- There is a difference between the cost to buy (price) or what it really worth (market price).
- There exists a special relationship between buyers and sellers where party have an influence on the other party.
Scope of Work
The appraisers have to identify the key parts of the problems of appraisal during the beginning of each assignment:
- Intended users and other clients
- Value definition
- Hypothetical Condition or Extraordinary assumptions
- Analysis of effective date of Appraisal
Based on the above mentioned factors, the appraisers must identify the scope of that work which includes the methodologies and the required approaches for the value. Such as the expectations of the users and the clients and the actions of peers in appraiser groups who carried out the assignments.
In any appraisal process, the scope of the work is the first step. Without strict definition, the scope is inviable.