Valuation methods
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Valuation methods

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Valuation methods Valuation methods Presentation Transcript

  • Valuation Consulting 49-50 The Hop Exchange,24 Southwark Street, London, SE1 1TYTel: 020 7403 3344 Fax: 0207 499 2266e-mail: valconsult@valconsulting.co.uk www.valuation-consulting.co.uk
  • VALUATION CONSULTINGSTARTING AT THE TOP AND TRYING TO BUILD DOWN. THE LAWS OF PHYSICS AND VALUATION SUGGEST THAT THIS IS NOT POSSIBLE.
  • VALUATION CONSULTING OCCASIONS FOR VALUING INTELLECTUAL PROPERTY• Mergers & Acquisitions• Portfolio Review and risk assessments• Arrange a loan - securitisation• Tax purposes• Licensing• Balance Sheet purposes• Joint Ventures• Selling your Company• Selling your IP• Insurance
  • VALUATION CONSULTING METHODS OF VALUATIONMarket Based• Comparable market transactions
  • VALUATION CONSULTINGCOMPARABLE MARKET TRANSACTIONS • Few Sales • Lack of Information • Separate Values • Special Purchasers • Different Negotiating Skills • Distorting Effects of Varying Values • Assets Not Always Comparable
  • VALUATION CONSULTINGMETHODS OF VALUATIONCost Based• Historical or replacement cost
  • VALUATION CONSULTINGHISTORICAL OR REPLACEMENT COST Caveats • Economic Benefits Excluded • Duration of benefit-economic life • Obsolescence difficult to quantify • Maintenance • Time value of money
  • VALUATION CONSULTING METHODS OF VALUATIONIncome Approach • Capitalisation of historical profits • Future economic benefits
  • VALUATION CONSULTING CAPITALISATION OF HISTORICAL PROFITSDRAWBACKS Profitability • Problems of averaging • Problems of extrapolating from past performance • Decline & other key variables • Net tangible assets not separately assessed Multiple • No reference point for price earnings multiple • Often no regard to established marketplace • Often no reconciliation with market capitalisation
  • VALUATION CONSULTING MODERN VALUATION ANALYSIS IS EFFECTIVELY DCF APPLIED TO THE BUSINESS ENTERPRISE UNDER CONSIDERATION• The Net Present Value (NPV) of a strategy or business is the sum of its expected free cash flows to a horizon (H) discounted by its cost of capital (r)NPV = Year 1 Cash Flow + Year 2 Cash Flow ... to say Year 5 Cash Flow (1 + r) (1 + r) ² (1 + r)HPLUSThe terminal value which is the value of the business at a horizon (HV)HV = Cash Flow (r - growth)Also discounted back to present value
  • VALUATION CONSULTINGHOW MUCH?(CASHFLOWS)
  • VALUATION CONSULTINGGROSS PROFIT DIFFERENTIAL METHOD Assessment of margins • Generic or unbranded • Branded • Prices • Volumes • Maintenance
  • VALUATION CONSULTING GROSS PROFIT DIFFERENTIAL METHODLimitations• Net Tangible Assets and Rate of Return ignored• Cost & production efficiencies not isolated• Economies of scale not considered• Information about other product’s cost, volumes, etc not available• No generic brand name for comparison• If so differences in quantity, quality, availability• Market trends over time• Bias towards industries with lower variable costs to total costs
  • VALUATION CONSULTING EXCESS PROFITS METHODFeatures• Calculate current market value of Net Tangible Assets• Estimate Rate of Return to calculate required profits• Excess above required level to induce investment• Attribute excess to intangibles• Capitalise this return• Ensure careful segregation to identifiable products• Those unidentifiable must be goodwill
  • VALUATION CONSULTING EXCESS PROFITS METHODLimitations• Rate of Return can be a reflection of other factors• Does not allocate between parts• Tangible assets often incorporate intangible value ie value in use basis• Information about technological developments often not available• Assets being valued not employed in best manner• Asset values & reported profits often calculated on a different basis• Erosion of margin over time by competitive pressures• Benefit of lower depreciation of branded products• Required Rate of Return often an ingredient in sale price• Method ignores potential profit from extensions
  • VALUATION CONSULTING ROYALTIES FOREGONE/RELIEF FROM ROYALTYFeatures• Estimate future royalty stream• Basic premise sale & lease-back• Usually maximum basis with acceptable Rate of Return• Alternatively payment for your use• Royalty equivalent to excess profit component• Greater availability of independent economic & trade association forecasts• Facilitates comparison with Royalty Rates of similar intellectual property in marketplace
  • VALUATION CONSULTING ROYALTIES FOREGONE/RELIEF FROM ROYALTYProblems• Separation of intangible components• Other factors often an ingredient in determining current Royalty Rate eg geographical goodwill or monopoly• Comparable may be out of date lack of detailed information arrangements may preclude extensions
  • VALUATION CONSULTINGHOW LONG FOR? (TIME PERIODS)
  • VALUATION CONSULTING AT WHAT RISK? (COST OF CAPITAL)
  • VALUATION CONSULTING MONTE CARLO• Effectively a DCF multiplier• Numerous DCF calculations accounting for various scenarios, say of revenue, market share, costs, internationality and other risks• With just 4 scenario changes of the stated assumptions above this means 256 models!• That is 4 values for each of income, different market share, costs, international penetration i.e. 4 x 4 x 4 x 4 = 256
  • VALUATION CONSULTING 1-10 – 100 RULE• Often scarce capital resources• Each stage in a technical development costs 10 times as much as the previous one• Assumption of success – the probability of failure at each stage could be 90% +• Even with 50% probability an inventor needs two ‘up his sleeve’, at each stage• Multiplier effect