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Which Valuation Method is Right for You?

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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: 

  1. Review the performance of a business
  2. 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 -

  • 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.
  • 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.

  • 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.
  • 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.

  • All assets are adjusted to their replacement value.
  • All leased assets are included.
  • 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 robin@cbkfamily.com
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Contact:

Robin Trehan
Managing Director & Vice President
National Hotel Exchange and CBK Family
123 West Madison St., Suite 402 
Chicago, IL-60602
Phone 312-920-1900, 312-920-1555
1-866-NHE-HOTEL
Fax     312-920-1950
robin@cbkfamily.com
www.nationalhotelexchange.com
www.cbkfamily.com

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Also See: Core or Competitive Competence in Hospitality Industry? / Robin Trehan / August 2005
Examining the Best Approach to Each Hospitality Asset - National Hotel Exchange / July 2005
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