From the Corporate Finance Faculty of the ICAEW
Issue 4 December1997 ISBN 1 85355 788 9
Page 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Introduction Ownership of a business Bases of valuation The valuation requirement Required return on investment Valuation methodsMarket based methods Asset based methodologies The DCF technique Trading companies: the choices Asset based approaches The use of DCF Financing considerations More complex methods Industry ‘rules of thumb’ Shareholder value analysis techniques Information about the business Required market information Applying market information Overseas valuations Bibliography 2 2 3 4 4 5 5 6 6 8 9 9 10 10 11 12 1314 15 15 17
Research indicates that Faculty members expect regular information, ideas and guidance. The concept Corporate Finance Guidelines has therefore been adopted. As chartered accountants often have less time available for reading than they would wish, these documents are succinct and the writers will direct the reader to other, and often fuller, expositions on the subject. Theguidelines will give a general overview and an analysis of the critical features of the subject, aiming to be practical. Some will summarise suggested good practice and others will be discussions on current conditions. Authors are chosen on a ‘most appropriate for the subject’ basis. The guidelines represent the personal views of the authors and not necessarily those of their firms or of theFaculty. Some guidelines will have a limited life and will be updated in due course. The nature of some subjects will preclude the guidelines from being definitive or mandatory. Being general in nature, the points made in the guidelines may or may not be relevant to specific circumstances. The Faculty committee intends that the guidelines will act as an aide-mémoire for members, provide new ideas, andencourage good practice, but cannot accept responsibility for their accuracy or completeness. Responses from the membership will be a very important part of the successful development of the guideline tool. Comments please, to Peter Mayatt on 0171-920 8485
Maggie Mullen is a partner and Paul Sinclair is an assistant director in the Corporate Finance department of Coopers & Lybrand.
ICAEW(Corporate Finance Faculty)
Corporate Finance Guideline
Business valuations are required in many different situations, including: Purchases and sales of businesses and interests in businesses, be they shareholdings, partnership interests or other investments. Mergers, reconstructions and increases in share capital. Statutory or contractualsettlements. For litigation purposes. To aid internal management decisions, for example shareholder value impact. Establishing and settling taxation liabilities.
In this Corporate Finance Guideline we are primarily concerned with business valuation, that is the valuation of unquoted equity and partnership interests in businesses, although many of the comments apply equally to the valuation of atrading division, a part of a business or other commercial investment such as preference shares and debentures. This Guideline is an update of the Good Practice Guideline issued by the Faculty of Finance and Management in April 1994. The principal new material covers the use of adjusted present value, option pricing and return to equity techniques (refer to Section 14 below) and the use of valuationtechniques in the context of shareholder value analysis (refer to Section 16 below). Valuation is not a precise science; it is subjective and requires the application of experience and judgement to the given facts to arrive at a reasoned and reasonable value. There is no single ‘right’ answer; there are reasoned and reasonable values. All value lies in the future; the value of an undertaking...