Business Valuation at A Glance

By: Dipta Dharmesti

I actually write this to make an easy way to recall my memory about my job description. Last year, I worked in a medicine factory as a quality assurance specialist. But now I am a business valuation analyst of an American business valuation company. When my friends ask me, “Where do you work at?” My answer is, “In a business valuation company.” Then they ask, “What is business valuation?”

Business valuation company is not popular in the country where I live, Indonesia. Here, people don’t even care about valuing a business, because they don’t know the purpose of business valuation. Let me explain, there are several reasons for a company to know their business value: employee stock options (ESOP) sharing, gift or property tax (if they want to share the tax income of some properties they have), stock options, partnership, marital dissolution, and more.

Business valuation is in the area of finance and accounting and I am totally new for this job. What do I do in my office? The essence of my job is making business valuation reports for the clients. Basically, there are three approaches of valuing a business:

1. Income approach
Each company must have periodical financial statements. It is an analyst’s job to examine the financial statements, especially the revenue or income part, perform some calculations, and conclude the value of the firm or company. There are two major parts to be examined: capitalization of earnings (Cap. Earnings) and discounted cash flows (DCF) or cash flows. By the case and conditions (e.g. valuing controlling or non-controlling, minority or majority interests), analyst will decide to use control premiums or discount to adjust the value.

2. Market approach
Market conditions influence the value of a company. Talking about discounts, there are two kinds of discount considered: Discount of Lack of Control (DLOC) that represents shareholders’ control of the firm, and Discount of Lack of Marketability (DLOM) that represents the ability for a firm to be marketed (sold).

Market approach consists of two methods:
– Public Company (PC) guidelines
This method compares client company’s financial to public companies’ that have similar business. Data collected from subscribed sites, and those subscriptions are expensive. Analyst has to see the business description and sort the companies which have similar business as client’s. Beside the description, analyst had to see those public companies’ sales.

– Merger & Acquisition (M&A) guidelines
When using M&A method, analysts will collect M&A transaction data of certain periods from subscribed sites. Then, like the PC method, sort the data, perform some comparisons and calculations. M&A tends to represent control of the firm, while PC method usually follows the nature of DCF.

Then, the analyst will decide to use control premiums or discounts, based on the case and conditions.

3. Asset approach
This kind of approach is based on client company’s assets. Net Asset Value (NAV) used in this method. Again, analyst’s job is to examine client’s financials and perform some calculations before deciding the company’s value. Control premiums or discounts can be used to adjust the value, based on the company’s conditions.

In a business valuation report, there are company background, profiles, ownership, tax status, economic outlook, and industry analysis, beside the financial methods.

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