Questions and Answers on Valuations

Practical answers and explanations to a selection of over 550 Questions and Answers on the Valuations of Businesses, Intellectual Property, Goodwill, Brands, Company Shares, Equity, Commercial and Investment Property, and Special Valuation Cases

 

SOME SELECTED QUESTIONS FROM THE BOOK

 

• What is a valuation? What is the difference between an assessment, an appraisal and a valuation?

 

• What is a business valuation?

 

• What are the “Big 6” of business valuations?

 

• What are the “Big 10” of commercial property valuations?

 

• What are the “Big 7” in the valuation process?

 

• What are the 7 principles of valuations?

 

• How does one create, protect and capture value?

 

• What is the earnings power of a business?

 

• What are the valuation fundamentals?

 

• What are the most common errors, mistakes and red flags in valuations?

 

• What are the fundamental differences in valuing a business from that of a commercial property?

 

• What are the “Big 10” of commercial property valuations?

 

• How can valuations help improve the performance of a business and in particular guidance for management?

 

• What are the four major determinants of value?

 

• What is the role of valuations in business rescue?

 

• Why is it important for a company to know the valuation of its business and not only its shares?

 

• What are the critical valuation considerations for a company or close corporation subject to business rescue?

 

• What is the role of valuations in buying or selling a business?

 

• How can valuations contribute to improved future business performance?

 

• Does the purpose of the valuation influence the valuation process?

 

• Can valuations help with restructuring of the business?

 

• How does valuations assist one in fundamental transactions?

 

• What are the challenges of determining a credible valuation?

 

• How is the valuation equation defined?

 

• What is the role of valuations and the business judgment rule?

 

• Who may value a business?

 

• What are the main valuation rules?

 

• How does one value a sole proprietor vs partnership vs close corporation vs company vs business trust?

 

• What is the difference between a business valuation and share valuation?

 

• How is tax treated in business valuations and property valuations? what are the applicable taxes and tax implications?

 

• Is the market value or market price the business value?

 

• What are the benefits of an independent valuation?

 

• Can one value a business with no assets?

 

• What is more critical for a business valuation computation – past historical actual profits or future projected profits?

 

• What is the difference between fair market value and fundamental intrinsic value?

 

• What is the difference between market price and market value?

 

• What does beta mean?

 

• What is so confusing about a business valuation and an equity / share valuation?

 

• Why can’t one just do one valuation – a business valuation or equity valuation?

 

• What are the features of a corporate or business profile?

 

• What should go into a Shareholders Agreement in relation to valuations?

 

• How are valuations implicated in the Solvency and Liquidity Test of the new Companies Act?

 

• How does control impact on the valuations?

 

• What is the correlation between a minority interest disposal and a Shareholders Agreement?

 

• Are loans from shareholders debt or equity?

 

• What is the correlation and impact of the four financial reports of the Annual Financial Statements on the business valuation?

 

• When one does a valuation for a Non-South African company, what are the considerations?

 

• Which sections in South African Companies Act, 2008, requires a valuation?

 

• What is the critical valuation consideration for buying and selling a business, for example, mergers and acquisitions transactions?

 

• Is there protection for minority shareholders in the event of the sale of their shares at a transaction price below fair values?

 

• What is the main difference in valuing a profit company from that of a Non-Profit Company?

 

• What forms part of the hand-over documentation in relation to the sale of shares or member’s interest?

 

• What are SARS’ requirements for share valuations in an estate?

 

• How does one value a business and a company for estate duty purposes when the date of death of the applicable shareholder is different from the date of the AFS?

 

• What adjustments needs to be made in the case of a deceased estate where the valuation of the applicable business or company is different from the date of death, and no financials are available at date of death?

 

• How does the going concern impact on valuations?

 

• How important is the period of future earnings and whether the earnings is fluctuating or showing constant growth?

 

• What are expense items to consider in normalising and adjusting historical earnings?

 

• What is the correlation between business valuations and the business model?

 

• Should one value on a post-tax earnings or pre-tax earnings basis?

 

• When should one use earnings as opposed to cash flow in the business and equity valuation computation?

 

• What is the impact on valuations if a company has par value shares or no par value shares?

 

• How does the legal ownership of business entities impact on the valuation?

 

• Should an equity valuation include the valuation of majority interest i.e. control premium and minority interest, i.e. minority discount?

 

• What is a desktop valuation? What is a benchmark valuation? What is a rigged valuation?

 

• What is a blue-chip business?

 

• What is a valuation due diligence?

 

• How does one value a book of clients (client base)?

 

• How are non-productive assets dealt with in a business valuation?

 

• How does inflation impact on valuations?

 

• How does one determine the economic life of a business at any point in time?

 

• When should one base the valuations on forecast earnings as opposed to forecast cash flows?

 

• What is the window period? What is the terminal period?

 

• How does one value a business that has not started generating future earnings?

 

• What are the factors influencing forecast and projected earnings during the window period?

 

• When does one base the business valuation on earnings as opposed to cash flow?

 

• What drives the value of a business?

 

• What are the essential resources: documentation, information and tools, that must be available to do a business and equity / company / share valuation?

 

• When should one sell or buy the business assets out of the entity as opposed to buying the shares or equity?

 

• What are the essential steps to valuing a business?

 

• How can a forensic audit assist in a valuation?

 

• Does a valuation require a forensic audit or a due diligence audit?

 

• What is the documentation and information required to prepare a formal valuation?

 

• What are the key valuation ratios and key valuation indicators?

 

• What key information needs to be assessed and evaluated in relation to the financial statements of a business that is subject to a valuation?

 

• What is the correlation between the business life cycle, product life cycle and valuations?

 

• What are the main valuation assumptions?

 

• What are the key financial indicators of a business valuation?

 

• What is the significance of future CAPEX in a valuation?

 

• Can a start-up be valued?

 

• How does dividends paid and dividends received impact on valuations?

 

• Can one value a number of companies within a group by way of the holding company valuation?

 

• How does gearing impact valuations?

 

• How can a loan from shareholders of a company or a loan from members of a close corporation be treated for valuation purposes – equity or debt?

 

• What are the valuation approaches? What are the valuation methods? Which valuation methods should be avoided?

 

• Why should valuations not be based on EBITDA, Multiples or WACC?

 

• What is the difference between the cost of capital and cost of equity?

 

• What are the risk ratios? What are the return ratios?

 

• How does one determine the company or entity’s business specific risk?

 

• How does one calculate the expected rate of return?

 

• What is the difference between the discount rate, fair rate of return, internal rate of return and hurdle rate?

 

• What is the difference between the return on equity and the cost of equity?

 

• What is the discount rate and risk free rate for a business valuation and how is it calculated?

 

• What is the correlation between the cost of equity and return on equity?

 

• What is the correlation between value drivers and business risk factors?

 

• What is the difference in the discount rate and the capitalisation rate?

 

• What is the cost of equity (discount rate) for a private company as opposed to a public or listed company? ?

 

• Is a valuation of a business based on the cost of equity or WACC?

 

• What is systematic risk versus unsystematic risk?

 

• What is the basis of the expected risk premium computation?

 

• What is the significance of the liquidity and tradeability risk?

 

• What is the valuation approach when valuing a business that is a going concern as opposed to a business that is not a going concern?

 

• Why is the dividend discount model or Gordon’s Growth Model not a fundamental equity valuation?

 

• What are the value drivers of a franchise valuation?

 

• What is the fundamental difference between an earnings-based valuation as opposed to a cash flow-based valuation?

 

• What are the determining factors in deciding which primary valuation method to use for a business valuation?

 

• What is the rule of thumb method? What is the earnings yield method? What is the dividend yield method?

 

• What is a Price:Earnings multiple method and when should it be used?

 

• What is the relief from royalty method? What is a transaction valuation? What is the reproduction cost method?

 

• What is the intrinsic cost method and when should it be used?

 

• How does one value a business with more than one core operation or operating units?

 

• How does one value capital intensive businesses versus non-capital intensive businesses?

 

• What are the unique considerations in valuing an owner-managed business?

 

• How does one deal with estate duty, deferred tax, dividend tax, SBC tax, CGT in valuations?

 

• How does one treat an assessed loss or computed loss in the business valuation computation?

 

• How does one value intangibles, including IP, brands, franchise rights, royalties, patents?

 

• What is accounting goodwill vs economic goodwill, and what is the basis, justification and computation of economic goodwill?

 

• What are the main reasons for negative goodwill?

 

• How should a preference share be valued?

 

• Should a valuation of a listed company be based on fundamental analysis or technical analysis?

 

• How does one convert an enterprise valuation into an equity valuation and what is an example of a valuation reconciliation?

 

• What are the considerations in valuing a farm property which has a farming business?

 

• What are the types of software business and what are the rules for valuing a software business?

 

• What are the contents of and minimum information in a Business Valuation Report?

 

• What are the contents of and minimum information in a Commercial Property Valuation Report?

 

• Where do valuations fit into an Integrated Report?

 

• What are the critical considerations when reviewing a business valuation?

 

• What are the factors influencing real estate valuations?

 

• Does the financial structure impact on the value of a commercial property?

 

• What are the valuation methods for valuing commercial property?

 

• What are the main areas in a commercial property due diligence?

 

• What are the property specific risk factors that needs to be assessed when valuing a commercial property?

 

• How does the interest cost on property finance influence a property valuation?

 

• Is a commercial property valuation on a pre-tax or post-tax basis?

 

• What are the valuation assumptions for commercial property valuations?

 

• What are the property risk costs that forms the basis of the discount rate and capitalisation rate for commercial property valuations?

 

• When should one value a commercial property on the basis of capitalised earnings as opposed to discounted earnings or discounted cash flow?

 

• What is the property valuation method decision tree?

 

• What are the valuation methods that can be used to value investment properties?

 

• Does one account for capital gains tax (CGT) in the property valuation?

 

• Does one account for dividend tax in the property valuation where a company is to be liquidated or shares to be sold?

 

• How are the three valuation approaches applied to property valuations?

 

• What are the value drivers applicable to immovable property?

 

• What is an economic life of an investment property?

 

• What are the circumstances where the market approach is used in property valuations?

 

• How does gearing or leverage affect the valuation of a property?

 

• Should one value a commercial property on the basis of potential rental or actual rental earned?