Valuation Consulting

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Valuation Consulting 49-50 The Hop Exchange, 24
Southwark Street, London, SE1 1TY Tel [phone]
3344 Fax [phone] e-mail
valconsult_at_valconsulting.co.uk www.valuation-consu
lting.co.uk
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VALUATION CONSULTING
STARTING AT THE TOP AND TRYING TO BUILD
DOWN. THE LAWS OF PHYSICS AND VALUATION
SUGGEST THAT THIS IS NOT POSSIBLE.
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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

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VALUATION CONSULTING

• METHODS OF VALUATION
• Market Based
• Comparable market transactions

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VALUATION CONSULTING

• COMPARABLE MARKET TRANSACTIONS
• Few Sales
• Lack of Information
• Separate Values
• Special Purchasers
• Different Negotiating Skills
• Distorting Effects of Varying Values
• Assets Not Always Comparable

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VALUATION CONSULTING

• METHODS OF VALUATION
• Cost Based
• Historical or replacement cost

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VALUATION CONSULTING

• HISTORICAL OR REPLACEMENT COST
• Caveats
• Economic Benefits Excluded
• Duration of benefit-economic life
• Obsolescence difficult to quantify
• Maintenance
• Time value of money

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VALUATION CONSULTING

• METHODS OF VALUATION
• Income Approach
• Capitalisation of historical profits
• Future economic benefits

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VALUATION CONSULTING

• CAPITALISATION OF HISTORICAL PROFITS
• DRAWBACKS
• Profitability
• Problems of averaging
• Problems of extrapolating from past
  performance
• Decline other key variables
• Net tangible assets not separately
  assessedMultiple
• No reference point for price earnings multiple
• Often no regard to established marketplace
• Often no reconciliation with market
  capitalisation

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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)H
• PLUS
• The terminal value which is the value of the
  business at a horizon (HV)
• HV Cash Flow
• (r - growth)
• Also discounted back to present value
  

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VALUATION CONSULTING
HOW MUCH? (CASHFLOWS)
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VALUATION CONSULTING

• GROSS PROFIT DIFFERENTIAL METHOD
• Assessment of margins
• Generic or unbranded
• Branded
• Prices
• Volumes
• Maintenance

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VALUATION CONSULTING

• GROSS PROFIT DIFFERENTIAL METHOD
• Limitations
• Net Tangible Assets and Rate of Return ignored
• Cost production efficiencies not isolated
• Economies of scale not considered
• Information about other products 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

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VALUATION CONSULTING

• EXCESS PROFITS METHOD
• Features
• 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

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VALUATION CONSULTING

• EXCESS PROFITS METHOD
• Limitations
• 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

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VALUATION CONSULTING

• ROYALTIES FOREGONE/RELIEF FROM ROYALTY
• Features
• 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

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VALUATION CONSULTING

• ROYALTIES FOREGONE/RELIEF
• FROM ROYALTY
• Problems
• 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

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VALUATION CONSULTING
HOW LONG FOR? (TIME PERIODS)
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VALUATION CONSULTING
AT WHAT RISK? (COST OF CAPITAL)
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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

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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