| By Robin Trehan (B.A, MIB, MBA). Vice President, National Hotel
Exchange and CBK Family, August 2005
The purpose of company valuation is to measure the the �right value�
of a business. The valuation of a business provides:
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Review the performance of a business
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Communicate to others (such as shareholders, investors, employees and the
market) the value of firm�s strategies and its results.
There are different methods of measuring the value of a Hotel business.
1. Equity based method - The most basic method for a company
is based solely on the values recorded in the firm�s financial statements
(balance sheets; profit and loss statement and cash flow management statements).
This method is based on the assumption the value of the firm is nothing
but the sum of its assets, leaving aside the capacity of the company to
generate values.
These methods provide for a quick evaluation of a company but presents
with two major disadvantages -
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Obsoleteness - the information recorded in the financial statements reflects
the state of the company at a given past time, thus, operations made by
the company form that moment on, are not considered as providing of reducing
value of the company. They do not consider company as an ongoing business.
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Inaccurateness - these methods are not able to take into consideration,
the non-monetary value of managerial know how and company�s innovation,
as well as the firm�s capacity to create value in the future, the required
funds to maintain the company running, the market value of the assets and
liabilities (as they are recorded at historic value), and the value of
money in time. They can also be greatly influenced by the firms accounting
policy, such as the use of last in first out (LIFO) or first in first out
(FIFO) method for inventory valuation, the amortization of Goodwill, the
realization of expenses, and the capitalization of cost.
2. Accounting based valuation -This kind of valuation takes into
account the accounting information obtained from the company�s balance
sheets without performing any kind of adjustments. The value of the company
is given by the difference between the total assets and total liabilities.
Corporate value = Total Assets - Total Liabilities
3. Adjusted net assets valuation - This method tries to fix the
historical evaluation method by making the following adjusts to the value
of the assets by moving them toward the realization value by.
a. Reduction of non-value assets [AssetsSNV] such as accrued
charges and the cost of installation.
b. The inclusion of those intangible assets [Int. assets] that provide
for a value in the market, such as right to exercise a leasin
c. The revaluation of fixed assets [AssetsSRV] as was going to be sold.
The value of the firm is than taken by
Corporate value = Adjusted net assets
= [AssetsSRV + Int. assets] - [AssetsSNV + Liabilities]
4. Liquidation based method - This valuation approach supposes
the termination of business under two different points of view.
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A progressive sale of assets- Where the company is considered to be able
to progressively sell its assets, and terminate operation in the far future.
Assets are then valued at liquidation value [AssetLV]. Using this method,
assets are priced at Lower value than their liquidation value, and some
liquidation cost is not considered (such as penalty cost of personal dismissal,
while the liabilities are kept at the book value.
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A forced liquidation of the company- This method provides for the liquidation
of assets at the book value, but the liabilities are adjusted to include
liquidation related obligations (such as personnel dismissal cost)
Corporate Value = [AssetLV] - (Liabilities)
5. Intrinsic value or usage value - The most basic one form the
buyer�s perspective, considers the amount of fund required for rebuild
the �company/business� to its current state based on the replacement value
of the assets.
6. Substantial value - It represents the economic value for the
buyer. The value of the company is computed by applying in the following
rules.
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All assets are adjusted to their replacement value.
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All leased assets are included.
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All assets not required for operations are included.
7. Required capital for exploitation - This method considers the
value of the company to be the value of the assets and funds required for
operations.
Do a proper SWOT (Strength, Weakness, Opportunity and Threats) of your
business and its market and choose the right valuation method. Each method
will give different result but a combined analysis of all will for sure
give a good valuation result.
 Robin
C. Trehan is in charge at CBK Family and National Hotel exchange for taking
the organization towards a REIT (Real Estate Investment Trust). He is also
an industry consultant in the field of mergers and acquisitions of real
estate & development companies. He can be reached at [email protected]
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