The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

Preface

VALUATIONS ARE IMPORTANT

Valuations are important simply because they form the basis for making decisions involving significant amounts of money or wealth transferred from one party to another.

Why do people perform valuations? What are they used for? The following is a short list, which is by no means complete. Valuations are normally done to:

• Buy or sell a stock of a publicly held firm.

• Buy or sell a privately held business.

• Determine how much estate tax is owed the government.

• Settle a divorce.

• Resolve a dispute with a minority shareholder who wants out.

• Give an accounting auditor value basis for reporting.

• Determine the amount of compensation for executives, division or business unit managers, and employee-owners.

• Determine whether to proceed with strategic initiatives and/or major investment opportunities.

• Offer fairness opinions in the purchase or sale of companies.

VALUATION CHALLENGES: WHICH TECHNIQUES TO APPLY

Broadly, valuation techniques may divide into two categories:

1. Those relying on quoted market prices of the specific security.

2. Those applying advanced professional knowledge to a set of data.

EXHIBIT P1.1 What is the Purpose of Valuation?

The second category may further divide into three subcategories:

1. Applying a set of comparable company valuations to the subject firm.

2. Labor-intensive, expert techniques, such as discounted cash flow. ...