Valuation Techniques

1. Rule Of Thumb Method
Strategy Is Given By
Prof. Aman Agarwal
Presented By-
Yasha Singh
4113007007
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2. About Rule Of Thumb Method
• One of the most common technique to do the valuation of
small business.
• These rules or formulas are statistically derived from the scale
of many businesses of each type.
– E.g. some people says small weekly newspaper are worth 100% of the
years gross income. But, there can be a organisation which compile
statistics on 100 small weekly newspapers that were sold over a two
year period. They will then average all selling prices and calculate that
the average paper sold for 100% of one year’s gross income.
• This is how thumb rules are created.
• To apply the rule of thumb to a business that varies
significantly from the average is not appropriate.
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3. Value Of Specific Intangible
Assets
Strategy Is Given By
Prof. Aman Agarwal
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4. About Value Of Specific Intangible
Assets
• This is an overlooked approach to valuation.
• Approach is based upon the buyer’s buying a wanted
intangible asset versus creating it.
• May time buying can be a cost efficient and time saving
alternatives.
• Common application of this approach is acquisition of
customer base.
• While adopting approach, the value must be such that the
investor or seller can believe it to be a true value
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5. Economic Profit Model
Strategy Is Given By
Prof. Aman Agarwal
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6. About Economic Profit Model
• Economic profit measures the value created by the company
in a single period and is defined as follows:
• Economic Profit = Invested Capital × (ROIC − WACC)
• Where ROIC is return on invested capital and WACC is
weighted average cost of capital
• Since ROIC equals NOPAT divided by invested capital, we can
rewrite the equation as follows:
• Economic Profit = NOPAT − (Invested Capital × WACC)
• Where NOPAT is net operating profit after tax
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7. Guideline Transaction
Method or Direct Market
Data Method
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8. About Direct Market Data Model
• Using this method, the valuation analyst may determine
market multiples by reviewing published data regarding actual
transactions involving either minority or controlling
interests in either publicly traded or closely held companies.
• In judging whether a reasonable basis for comparison exists,
the valuation analysis must consider:
– the similarity of qualitative and quantitative investment and
investor characteristics;
– the extent to which reliable data is known about the
transactions in which interests in the guideline companies were
bought and sold; and
– whether or not the price paid for the guideline companies was
in an arms-length transaction, or a forced or distressed sale.
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