Selangor to redevelop PJ, Klang, Kajang
Tags: Kajang | Klang | land value | Petaling Jaya | Petaling Jaya City Council | redevelopment | Section 13 | Selangor Government | Tan Sri Khalid Ibrahim
Written by Au Foong Yee
Tuesday, 10 November 2009 12:00
SHAH ALAM: Certain industrial and older housing enclaves in Petaling Jaya, Klang and Kajang have been identified for redevelopment in a bid by the Selangor government to enhance their land value and to create a stimulus for the state.
Selangor Menteri Besar Tan Sri Khalid Ibrahim said the regeneration exercise would kick off in PJ. Owners of buildings in “three or four” areas, among them Section 13, would be given incentives to redevelop their buildings for commercial use.
“We have written to the industries concerned to relocate. If they agree to move, they can rebuild on the existing tract of commercial property with certain densities,” Khalid told The Edge Financial Daily and theedgeproperty.com in an interview here yesterday.
These industrial operations would be allowed to be relocated to other more acceptable areas in Selangor, such as those near ports, Khalid said.
The redevelopment would be in the interest of the property owners, he added. “What we gain is that PJ will become redeveloped and vibrant. They [landowners] will make the money — the state is just making the environment conducive for them.”
Asked whether redevelopment would create traffic and transportation related issues,with congestion being at the top of the list, Khalid conceded, “In a way, yes.”
“We have to show them that we cannot leave PJ in this [current] manner; we have to convince them that we will plan for and provide facilities to reduce congestion,” he said.
Towards this end, the state government has asked for another transportation study to be carried out, based on increased densities in the areas concerned. This is to establish whether the higher densities are feasible. The concept of park-and-ride is also being considered.
According to a report earlier this year in City & Country, the property pullout of The Edge weekly , the 220-acre hub of industrial activity in Section 13 was now dotted with “limited commercial” developments in the form of modern offices and retail blocks.
Factories have been operating in Section 13 since the 1960s, but in recent years, the area's growing potential for commercial activities could not be ignored, given its strategic location. This explained the Petaling Jaya City Council’s approval for “limited commercial” activities there, based on certain guidelines.
Meanwhile, on the revival and rehabilitation of abandoned housing projects in Selangor, Khalid said they had been quite successful — thanks to land-value appreciation over time, resulting in people willing to pay more for the completed units.
The challenge, however, was in the selection of the best contractors or developers to complete the projects.
Some of the rehabilitation projects were initiated by the state government which was willing to lose “a bit” so long as the project was completed, added Khalid.
This article appeared in The Edge Financial Daily, Nov 10, 2009.
Wednesday 11 November 2009
Plantation sector rating cut to neutral from overweight
http://www.theedgemalaysia.com/business-news/153204-PLANTATION%20[%3Cspan%20class-
Plantation sector rating cut to neutral from overweight
Tags: CPO price | Crude Oil | Genting Plantations Bhd | Indofood Agri-Resources Ltd | IOI Corp Bhd | Kuala Lumpur Kepong Bhd | Kulim (Malaysia) Bhd | neutral | plantation sector | Sarawak Oil Palms Bhd | TH Plantations Bhd | Wilmar International Ltd
Written by AmResearch
Monday, 09 November 2009 10:43
WE HAVE downgraded the PLANTATION [] sector from overweight to neutral. In addition, we have revised our recommendations on IOI CORPORATION BHD [] (IOI), KUALA LUMPUR KEPONG BHD [] (KLK), Wilmar International Ltd and Indofood Agri-Resources (IndoAgri) from buys to holds.
Earning estimates trimmed; fair values cut
Due to our lower average CPO price assumption for 2010F, we have revised earnings forecasts for companies under our coverage downwards by 4% to 11%, with the exception of SARAWAK OIL PALMS BHD [] (SOP). Despite this downward revision in our earnings estimates, EPS growth for FY10F will still be positive, driven by production growth and a low base effect in FY09F. Recall that earnings of bigger-caps like IOI and KLK in FY09F were affected by forex losses, provisions and lower manufacturing contribution resulting from writedowns.
CPO price assumption lowered to RM2,300/tonne
A result of our recent visits to companies under our coverage is that we are taking a more conservative stance on crude palm oil’s (CPO) pricing cycle — moving into 2010. We now expect prices of CPO to oscillate around RM2,300 per tonne — from our previous assumption of RM2,500/tonne. This implies that CPO prices are expected to remain somewhat flattish in 2010F.
Demand expansion may not keep pace with exceptionally strong supply growth from bumper harvests. We see demand and supply dynamics for CPO turning less favourable — pointing towards potential inventory imbalances — thus putting a cap on prices.
Supply concern is admittedly not new but this time around, we believe production will surprise on the upside due to: (1) A combination of expected normalisation in fresh fruit bunches (FFB) yields off depressed levels this year; and (2) Maturing acreage in 2010F. We reckon that FFB output could rise between 8% and 10% next year.
FFB production this year was affected by low yields resulting from poor fruit pollination and heavy rainfall. We think that palm oil inventory will range between 1.8 and two million tonnes next year — exerting downward pressure on CPO prices.
From January 2001 to September 2009, Malaysia’s average palm oil inventory was about 1.4 million tonnes per month. Average palm oil inventory for the past three years has been roughly 1.6 million tonnes/month while average stock usage was 1.3 times. We reckon that with a higher inventory level, stock usage could rise to 1.4 times to 1.5 times next year.
Plantation sector rating cut to neutral from overweight
Tags: CPO price | Crude Oil | Genting Plantations Bhd | Indofood Agri-Resources Ltd | IOI Corp Bhd | Kuala Lumpur Kepong Bhd | Kulim (Malaysia) Bhd | neutral | plantation sector | Sarawak Oil Palms Bhd | TH Plantations Bhd | Wilmar International Ltd
Written by AmResearch
Monday, 09 November 2009 10:43
WE HAVE downgraded the PLANTATION [] sector from overweight to neutral. In addition, we have revised our recommendations on IOI CORPORATION BHD [] (IOI), KUALA LUMPUR KEPONG BHD [] (KLK), Wilmar International Ltd and Indofood Agri-Resources (IndoAgri) from buys to holds.
Earning estimates trimmed; fair values cut
Due to our lower average CPO price assumption for 2010F, we have revised earnings forecasts for companies under our coverage downwards by 4% to 11%, with the exception of SARAWAK OIL PALMS BHD [] (SOP). Despite this downward revision in our earnings estimates, EPS growth for FY10F will still be positive, driven by production growth and a low base effect in FY09F. Recall that earnings of bigger-caps like IOI and KLK in FY09F were affected by forex losses, provisions and lower manufacturing contribution resulting from writedowns.
CPO price assumption lowered to RM2,300/tonne
A result of our recent visits to companies under our coverage is that we are taking a more conservative stance on crude palm oil’s (CPO) pricing cycle — moving into 2010. We now expect prices of CPO to oscillate around RM2,300 per tonne — from our previous assumption of RM2,500/tonne. This implies that CPO prices are expected to remain somewhat flattish in 2010F.
Demand expansion may not keep pace with exceptionally strong supply growth from bumper harvests. We see demand and supply dynamics for CPO turning less favourable — pointing towards potential inventory imbalances — thus putting a cap on prices.
Supply concern is admittedly not new but this time around, we believe production will surprise on the upside due to: (1) A combination of expected normalisation in fresh fruit bunches (FFB) yields off depressed levels this year; and (2) Maturing acreage in 2010F. We reckon that FFB output could rise between 8% and 10% next year.
FFB production this year was affected by low yields resulting from poor fruit pollination and heavy rainfall. We think that palm oil inventory will range between 1.8 and two million tonnes next year — exerting downward pressure on CPO prices.
From January 2001 to September 2009, Malaysia’s average palm oil inventory was about 1.4 million tonnes per month. Average palm oil inventory for the past three years has been roughly 1.6 million tonnes/month while average stock usage was 1.3 times. We reckon that with a higher inventory level, stock usage could rise to 1.4 times to 1.5 times next year.
KLSE TRADE STATISTICS: LOCAL VS FOREIGN October 2009
http://spreadsheets.google.com/pub?key=txKJ-CJ_m_KD-Agbe6RtG5g&output=html
http://www.klse.com.my/website/bm/market_information/market_statistics/equities/downloads/trading_participation_investor2009.pdf
Observations:
The average price per unit volume of shares for the foreign institutions was MR 3.63; that for the local institution was MR 3.33.
The local retail investors were mostly into penny shares. The average value per unit volume traded was MR 0.66.
Half the volume of shares (49.96%) traded in October were generated by local retail investors.
Foreign Institutions were net buyers in October.
Local Institutions were net sellers in October.
No net change in value in trades of local retail investors. However, the volume of shares bought were higher than those sold.
The local retail investors were selling higher priced shares to buy into lower priced shares in October.
Based on value of shares traded, the Local Institutional funds were the biggest players in the local KLSE (43.69%).
http://www.klse.com.my/website/bm/market_information/market_statistics/equities/downloads/trading_participation_investor2009.pdf
Observations:
The average price per unit volume of shares for the foreign institutions was MR 3.63; that for the local institution was MR 3.33.
The local retail investors were mostly into penny shares. The average value per unit volume traded was MR 0.66.
Half the volume of shares (49.96%) traded in October were generated by local retail investors.
Foreign Institutions were net buyers in October.
Local Institutions were net sellers in October.
No net change in value in trades of local retail investors. However, the volume of shares bought were higher than those sold.
The local retail investors were selling higher priced shares to buy into lower priced shares in October.
Based on value of shares traded, the Local Institutional funds were the biggest players in the local KLSE (43.69%).
Russian shares are cheap again
Russian shares are cheap again
Eastern Europe has witnessed momentous changes since the fall of the Berlin Wall 20 years ago.
By Elena Shaftan
Published: 5:54AM GMT 05 Nov 2009
In the two decades since this historic event, the lives of people in the former Communist Bloc have changed beyond recognition – changes that have increasingly attracted the attention of investors since stock exchanges started to open up in the region in the early to mid 1990s.
During this time, investors' focus has largely been on the opportunities presented by the convergence of Eastern European economies with those in the West.
Commodity shares to rise However, 20 years on from the symbolic collapse of the Wall and notwithstanding some setbacks, a lot of the "easy gains" have arguably been made from this story.
Having been through some difficult adjustments in the 1990s, most former Communist states are now members of the EU and share a common legal and regulatory framework with the West.
Living standards in the region have improved across the board as wages have risen and consumers have begun to discover credit. However, labour costs in many economies remain about a quarter of those in the West and taxes are a third lower than in Germany, ensuring the region remains an attractive destination for companies seeking to lower production costs.
Yet the development of these young democracies has hardly been uniform – some very clear winners and losers have emerged and it is worth casting a fresh eye over the new opportunities ahead of us.
Followers of the region will be all too aware that some of the smaller countries in the Baltics and Balkans got carried away with borrowing their way to growth, resulting in much publicised economic imbalances. However, the situation in economies such as Poland, Turkey, Russia and the Czech Republic couldn't be more different and this is where I believe the greatest prospects now lie.
These countries are benefiting from an improving economic outlook. They have substantial and still under-developed domestic markets and, with consumer debt levels of only 10pc to 30pc of gross domestic product (GDP) - versus 100pc for the UK - offer superior growth prospects than their less-fortunate neighbours.
In Poland for example, economic growth was 1.1pc in the second quarter, having remained positive even during the depths of the financial and economic crisis. Poland has benefited from relatively low exposure to exports but its solid performance has also been underpinned by structural factors.
While many other emerging economies thrived in 2001-2002, Poland struggled as unemployment and interest rates hit 20pc. Now they are just 11pc and 3.5pc respectively and the economy is benefiting from the unleashing of substantial pent-up demand.
This, together with a far smaller debt burden than in many other European countries, has allowed consumers to continue spending and support the economy.
Poland and the Czech Republic are also net beneficiaries of EU funding that aims to improve infrastructure. In Poland for example these transfers are worth around 3pc of GDP per annum for the next four years and are set to boost investment and construction.
Turkey offers further opportunities. While the Turkish economy suffered a sharp contraction last winter, it rebounded rapidly with 12pc quarter on quarter growth between April and July.
A positive side effect of the crisis has been the taming of inflation which has been above 20pc for 25 of the past 30 years, but is now down to a historic low of 5.3pc. This has allowed the central bank to slash interest rates from almost 17pc a year ago to an all time low of 6.75pc.
Lower interest rates should feed through to loan growth and stimulate the economy. Signs of recovery are already emerging with home sales rising 72pc year on year in the second quarter, while seasonally-adjusted automobile sales in September are at record levels.
The Russian economy has also stabilised now that the financing constraints that held back businesses over the winter have eased. After a sharp sell off last year, shares in Russian oil and gas companies now appear cheap compared to historical norms and their international peers.
While the events of 2008 have demonstrated that commodity prices can fluctuate in the short term, the development of China and India provides a structural source of incremental demand that is likely to exert upward pressure on prices over time.
But Russia is not just about oil. It is a country of 140m people – a huge consumer market, with a growing middle class aspiring to raise living standards.
Consumption patterns are changing as a result. Russians still drink on average around eight times more vodka than Britons, yet over the past decade, consumption of beer and fruit juices have leapt from next to nothing to near European levels.
Similar trends are emerging for other goods such as yoghurts, mineral water, vitamins, computers, broadband and banking services. These trends are likely to develop over time, benefiting the strongest local companies.
There are other reasons why we like these markets. First, their stock markets are large and liquid compared to others in the region, making them a more attractive destination for international investors, even though they carry more risk and experience greater volatility than Western counterparts.
Second, they often have very different dynamics, so investors can diversify while making the most of any economic and financial recovery.
Russia, for example, is the world's largest oil exporter, while Turkey imports most of the oil that it consumes. Investing in both means fund managers can take advantage of not only rising but also falling energy prices.
The Polish economy is driven primarily by domestic demand, which helped it to grow even when the rest of Europe was contracting in the first half of 2009. Czech equity markets, meanwhile, contain several solid defensive stocks that tend to be less susceptible to difficult economic conditions.
While stocks listed in the 'big four' markets of eastern Europe are most important for us at present, our ability to invest in the broader region means we can discover some hidden gems in smaller regional markets from time to time.
The ability to invest in a wide range of markets - including for example Israel and Croatia, and former Soviet republics such as Kazakhstan and Georgia - has given us the flexibility to adapt to different market conditions.
We are also exploring opportunities among West European companies with successful operations in Eastern Europe, further broadening the investment horizon.
The Eastern Europe of today is a very different place to that of 20 years ago. There have been economic winners and sadly, some losers. However, the opportunities for investors to profit from the region's success stories are clearer than ever.
Elena Shaftan is the fund manager of Jupiter Emerging European Opportunities Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/6501437/Russian-shares-are-cheap-again.html
Eastern Europe has witnessed momentous changes since the fall of the Berlin Wall 20 years ago.
By Elena Shaftan
Published: 5:54AM GMT 05 Nov 2009
In the two decades since this historic event, the lives of people in the former Communist Bloc have changed beyond recognition – changes that have increasingly attracted the attention of investors since stock exchanges started to open up in the region in the early to mid 1990s.
During this time, investors' focus has largely been on the opportunities presented by the convergence of Eastern European economies with those in the West.
Commodity shares to rise However, 20 years on from the symbolic collapse of the Wall and notwithstanding some setbacks, a lot of the "easy gains" have arguably been made from this story.
Having been through some difficult adjustments in the 1990s, most former Communist states are now members of the EU and share a common legal and regulatory framework with the West.
Living standards in the region have improved across the board as wages have risen and consumers have begun to discover credit. However, labour costs in many economies remain about a quarter of those in the West and taxes are a third lower than in Germany, ensuring the region remains an attractive destination for companies seeking to lower production costs.
Yet the development of these young democracies has hardly been uniform – some very clear winners and losers have emerged and it is worth casting a fresh eye over the new opportunities ahead of us.
Followers of the region will be all too aware that some of the smaller countries in the Baltics and Balkans got carried away with borrowing their way to growth, resulting in much publicised economic imbalances. However, the situation in economies such as Poland, Turkey, Russia and the Czech Republic couldn't be more different and this is where I believe the greatest prospects now lie.
These countries are benefiting from an improving economic outlook. They have substantial and still under-developed domestic markets and, with consumer debt levels of only 10pc to 30pc of gross domestic product (GDP) - versus 100pc for the UK - offer superior growth prospects than their less-fortunate neighbours.
In Poland for example, economic growth was 1.1pc in the second quarter, having remained positive even during the depths of the financial and economic crisis. Poland has benefited from relatively low exposure to exports but its solid performance has also been underpinned by structural factors.
While many other emerging economies thrived in 2001-2002, Poland struggled as unemployment and interest rates hit 20pc. Now they are just 11pc and 3.5pc respectively and the economy is benefiting from the unleashing of substantial pent-up demand.
This, together with a far smaller debt burden than in many other European countries, has allowed consumers to continue spending and support the economy.
Poland and the Czech Republic are also net beneficiaries of EU funding that aims to improve infrastructure. In Poland for example these transfers are worth around 3pc of GDP per annum for the next four years and are set to boost investment and construction.
Turkey offers further opportunities. While the Turkish economy suffered a sharp contraction last winter, it rebounded rapidly with 12pc quarter on quarter growth between April and July.
A positive side effect of the crisis has been the taming of inflation which has been above 20pc for 25 of the past 30 years, but is now down to a historic low of 5.3pc. This has allowed the central bank to slash interest rates from almost 17pc a year ago to an all time low of 6.75pc.
Lower interest rates should feed through to loan growth and stimulate the economy. Signs of recovery are already emerging with home sales rising 72pc year on year in the second quarter, while seasonally-adjusted automobile sales in September are at record levels.
The Russian economy has also stabilised now that the financing constraints that held back businesses over the winter have eased. After a sharp sell off last year, shares in Russian oil and gas companies now appear cheap compared to historical norms and their international peers.
While the events of 2008 have demonstrated that commodity prices can fluctuate in the short term, the development of China and India provides a structural source of incremental demand that is likely to exert upward pressure on prices over time.
But Russia is not just about oil. It is a country of 140m people – a huge consumer market, with a growing middle class aspiring to raise living standards.
Consumption patterns are changing as a result. Russians still drink on average around eight times more vodka than Britons, yet over the past decade, consumption of beer and fruit juices have leapt from next to nothing to near European levels.
Similar trends are emerging for other goods such as yoghurts, mineral water, vitamins, computers, broadband and banking services. These trends are likely to develop over time, benefiting the strongest local companies.
There are other reasons why we like these markets. First, their stock markets are large and liquid compared to others in the region, making them a more attractive destination for international investors, even though they carry more risk and experience greater volatility than Western counterparts.
Second, they often have very different dynamics, so investors can diversify while making the most of any economic and financial recovery.
Russia, for example, is the world's largest oil exporter, while Turkey imports most of the oil that it consumes. Investing in both means fund managers can take advantage of not only rising but also falling energy prices.
The Polish economy is driven primarily by domestic demand, which helped it to grow even when the rest of Europe was contracting in the first half of 2009. Czech equity markets, meanwhile, contain several solid defensive stocks that tend to be less susceptible to difficult economic conditions.
While stocks listed in the 'big four' markets of eastern Europe are most important for us at present, our ability to invest in the broader region means we can discover some hidden gems in smaller regional markets from time to time.
The ability to invest in a wide range of markets - including for example Israel and Croatia, and former Soviet republics such as Kazakhstan and Georgia - has given us the flexibility to adapt to different market conditions.
We are also exploring opportunities among West European companies with successful operations in Eastern Europe, further broadening the investment horizon.
The Eastern Europe of today is a very different place to that of 20 years ago. There have been economic winners and sadly, some losers. However, the opportunities for investors to profit from the region's success stories are clearer than ever.
Elena Shaftan is the fund manager of Jupiter Emerging European Opportunities Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/6501437/Russian-shares-are-cheap-again.html
The great natural gas conundrum
The great natural gas conundrum
Nebulous, drifting, volatile: all good ways to describe both natural gas and the conflicted outlook for the commodity among industry experts at the moment.
By Rowena Mason
Published: 9:38PM GMT 08 Nov 2009
A gas field exploration platform owned by China National Offshore Oil Corporation (CNOOC) in South China Sea.
On the one hand, a growing number of economists are the early-bird canaries in the mine, warning of a dangerous build up of natural gas on the verge of suffocating the market with an oversupply. On the other side, there is no shortage of energy companies dashing into the biggest gas extraction projects the world has ever known, proclaiming that a new era of burgeoning demand will be upon us.
So what has caused the commentators to float apart to such a degree? And whose sums look set to turn out to be an expensive mistake?
First, a look through the hazy clouds of forecasting at the fundamentals of the gas market. Henry Hub prices at the New York Mercantile Exchange have crashed 62pc this year. Reserves in the US are at historic highs. In fact, there's a glut of the stuff packed into disused fields and liquefied natural gas storage units across the globe. For many months now, producers have been hopefully waiting for gas prices to follow the oil price upwards, but the traditional connection – with a time lag between gas trailing oil – appears to have drifted out of kilter.
Part of this is the recession: Royal Dutch Shell, Europe's biggest energy company, warned two weeks ago that it had seen absolutely no increase in need for gas in Europe, and only a slight upturn in the US. In the short term, there has even been talk among Morgan Stanley analysts that the natural state of contango – where spot prices are lower than forward prices – could collapse causing the entire gas market to seize up next year.
Now the International Energy Agency is expected to warn this week that there is little chance of a recovery in demand before 2015, fuelled by a global drive to decarbonise with a new emphasis on renewable sources, nuclear power and energy efficiency.
But looking beyond the stagnant demand, oversupply has also been caused by technological breakthroughs in extraction techniques that mean so-called "tight" formations are getting cheaper to develop. The US was at one point speeding its way through natural gas reserves at an alarming rate, but over the past two decades, unconventional gas–from shales and coal-bed methane –has grown from 10pc to 40pc of the market.
Some commentators, including the Pulitzer Prize winning author of Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, have hailed this as a revolution in the fossil fuel industry that could change the world's whole gas balance if other countries follow America's lead. Technology has also given greater competition to the markets.
So why, if gas has become suddenly abundant, mobile and unwanted, are there still energy majors from BP to Shell to ExxonMobil keen to exploit expensive developments in far-flung, often hostile corners of the globe from Iraq to Russia's Yamal peninsula reserves?
The energy world still appears desperate to develop major gas developments like never before – the biggest being the massive Gorgon fields in Australia, where the energy giants have already signed multi-billion dollar contracts to supply China and India for decades to come. Frank Chapman, the chief executive of BG Group, even claims we will need "a Gorgon a year for the next 10 years" to meet ballooning global needs. Meanwhile, ExxonMobil, looking ahead, predicts that demand for gas in the West alone will grow by 2pc a year, or 30pc by 2030.
Part of the optimism is likely to be political: although countries are desperate to reduce emissions from fossil fuels, gas releases only half the carbon dioxide of coal when burned and is a much cheaper option than developing renewables. As the world also eventually weans itself off petrol and other oil-based products for transportation, electricity demand is set to double or triple.
One day in decades to come, cars and other modes of transport may all either be powered directly by natural gas or electricity generated by gas-powered and renewable power stations. Seizing on this opportunity, Tony Hayward, chief executive of BP, has recently been taking every chance to trumpet the potential of gas as the primary fuel of the medium-term future.
Some even believe the revolution in unconventional gas supplies will be unable to keep pace with this impending thirst for the commodity. Ofgem, the energy regulator, has taken forecast "tight" gas production into its estimates, but remains deeply concerned about the availability of gas in Europe over the next decade.
With all these shifting factors, one thing is for certain. Gas isn't behaving like ever before. And its future as a commodity is entirely interwoven with political decisions – highly unpredictable ones – about its reliability as a replacement for coal and oil.
http://www.telegraph.co.uk/finance/markets/6526528/Future-of-gas-linked-with-political-decisions.html
Nebulous, drifting, volatile: all good ways to describe both natural gas and the conflicted outlook for the commodity among industry experts at the moment.
By Rowena Mason
Published: 9:38PM GMT 08 Nov 2009
On the one hand, a growing number of economists are the early-bird canaries in the mine, warning of a dangerous build up of natural gas on the verge of suffocating the market with an oversupply. On the other side, there is no shortage of energy companies dashing into the biggest gas extraction projects the world has ever known, proclaiming that a new era of burgeoning demand will be upon us.
So what has caused the commentators to float apart to such a degree? And whose sums look set to turn out to be an expensive mistake?
First, a look through the hazy clouds of forecasting at the fundamentals of the gas market. Henry Hub prices at the New York Mercantile Exchange have crashed 62pc this year. Reserves in the US are at historic highs. In fact, there's a glut of the stuff packed into disused fields and liquefied natural gas storage units across the globe. For many months now, producers have been hopefully waiting for gas prices to follow the oil price upwards, but the traditional connection – with a time lag between gas trailing oil – appears to have drifted out of kilter.
Part of this is the recession: Royal Dutch Shell, Europe's biggest energy company, warned two weeks ago that it had seen absolutely no increase in need for gas in Europe, and only a slight upturn in the US. In the short term, there has even been talk among Morgan Stanley analysts that the natural state of contango – where spot prices are lower than forward prices – could collapse causing the entire gas market to seize up next year.
Now the International Energy Agency is expected to warn this week that there is little chance of a recovery in demand before 2015, fuelled by a global drive to decarbonise with a new emphasis on renewable sources, nuclear power and energy efficiency.
But looking beyond the stagnant demand, oversupply has also been caused by technological breakthroughs in extraction techniques that mean so-called "tight" formations are getting cheaper to develop. The US was at one point speeding its way through natural gas reserves at an alarming rate, but over the past two decades, unconventional gas–from shales and coal-bed methane –has grown from 10pc to 40pc of the market.
Some commentators, including the Pulitzer Prize winning author of Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, have hailed this as a revolution in the fossil fuel industry that could change the world's whole gas balance if other countries follow America's lead. Technology has also given greater competition to the markets.
So why, if gas has become suddenly abundant, mobile and unwanted, are there still energy majors from BP to Shell to ExxonMobil keen to exploit expensive developments in far-flung, often hostile corners of the globe from Iraq to Russia's Yamal peninsula reserves?
The energy world still appears desperate to develop major gas developments like never before – the biggest being the massive Gorgon fields in Australia, where the energy giants have already signed multi-billion dollar contracts to supply China and India for decades to come. Frank Chapman, the chief executive of BG Group, even claims we will need "a Gorgon a year for the next 10 years" to meet ballooning global needs. Meanwhile, ExxonMobil, looking ahead, predicts that demand for gas in the West alone will grow by 2pc a year, or 30pc by 2030.
Part of the optimism is likely to be political: although countries are desperate to reduce emissions from fossil fuels, gas releases only half the carbon dioxide of coal when burned and is a much cheaper option than developing renewables. As the world also eventually weans itself off petrol and other oil-based products for transportation, electricity demand is set to double or triple.
One day in decades to come, cars and other modes of transport may all either be powered directly by natural gas or electricity generated by gas-powered and renewable power stations. Seizing on this opportunity, Tony Hayward, chief executive of BP, has recently been taking every chance to trumpet the potential of gas as the primary fuel of the medium-term future.
Some even believe the revolution in unconventional gas supplies will be unable to keep pace with this impending thirst for the commodity. Ofgem, the energy regulator, has taken forecast "tight" gas production into its estimates, but remains deeply concerned about the availability of gas in Europe over the next decade.
With all these shifting factors, one thing is for certain. Gas isn't behaving like ever before. And its future as a commodity is entirely interwoven with political decisions – highly unpredictable ones – about its reliability as a replacement for coal and oil.
http://www.telegraph.co.uk/finance/markets/6526528/Future-of-gas-linked-with-political-decisions.html
Diary of a Private Investor
Diary of a Private Investor: My aggressive investment strategy has backfired
By the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
By James Bartholomew
Published: 6:49AM GMT 04 Nov 2009
I have to admit I jumped the gun.
As we were getting towards the end of October without suffering any significant setback in the stock market, I thought, "Hurrah! We have survived the most dangerous month of the year and now we have the run up to Christmas and beyond which usually is pretty good for shares."
Related Articles
Commodity shares are heading up So, thinking I would get ahead of the crowd, I put remaining cash into shares. I sold my Japanese yen bonds and put these into shares, too. What happened?
The October setback arrived late. My portfolio fell more than the market generally because I have been favouring what you could call "aggressive recovery plays".
I subscribed to the rights issue of Barratts, the house builder, and bought some extra shares into the bargain. I reckoned the price had been depressed by the rights issue and would rise when all the money was secured. I bought at 153p, only to see the shares fall back even further – to 122p.
I bought more Enterprise Inns, the pub owner, too, paying 139.9p. The shares had jumped 20p after the Office for Fair Trading said it has not found evidence that companies such as Enterprise Inns, which require their tenants to buy their beer, are reducing competition in a way that damages consumers.
This removed one of a little pile of concerns that has been weighing down the shares. I was hoping that as these various concerns were dealt with or found not to be quite so bad as feared that the price would float nearer to its net asset value. Instead, the shares fell more than most and traded around 118p this week.
I also recently bought a few shares in Indo-China Capital Vietnam Holdings at US$4.54. I like Vietnam, but did not quite realise when buying that the company seems to be winding itself down.
I also bought a few Real Estate Investors, a small property company, at 4.96p. I had noticed some director buying and, on looking into the detail, liked the look of it.
Finally, I bought a small holding Chaoda Modern Agriculture, an agribusiness quoted in Hong Kong. Chaoda grows vegetables, fruit and tea and sells to supermarkets and abroad. I bought at HK$6.33.
So I bought up to the hilt. All my cash was gone and most of my bonds, making me 95pc invested in shares or even more if you count my mortgage as financing my shares which is about right. Thus, by the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
I can't give a precise figure because my curiosity about exact changes in my portfolio's value dwindles when I am losing money.
And this is without counting my shares in Aero Inventory, which have been suspended, as I write, because the company had a problem with valuing, ahem, its inventory.
What now? I still believe November to Christmas and beyond is generally good for shares. David Schwartz, who looks at stock market statistics, has said there has not been much evidence of a seasonal trend this millennium.
It is possible something has changed or that the trend has become self-defeating as people try to get ahead of it. But, even on recent figures, shares have risen in more than half the November-to-March periods. I think there is some unknown force that tries to sustain the market. And I still think some of my shares are excellent value.
In the case of Barratt, I am encouraged by recent experiences of the property market. I am an executor of my uncle's estate. We put his house on the market and within three days agents had taken 42 people to it and we had an offer at the asking price. I am also an executor of another estate, where three potential buyers were vying for the house.
As for the stock market, the Bank of England has decided to do another £50bn of quantitative easing. I think and hope this should help keep shares out of trouble for a while at least.
http://www.telegraph.co.uk/finance/personalfinance/investing/6498737/Diary-of-a-Private-Investor-My-aggressive-investment-strategy-has-backfired.html
By the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
By James Bartholomew
Published: 6:49AM GMT 04 Nov 2009
I have to admit I jumped the gun.
As we were getting towards the end of October without suffering any significant setback in the stock market, I thought, "Hurrah! We have survived the most dangerous month of the year and now we have the run up to Christmas and beyond which usually is pretty good for shares."
Related Articles
Commodity shares are heading up So, thinking I would get ahead of the crowd, I put remaining cash into shares. I sold my Japanese yen bonds and put these into shares, too. What happened?
The October setback arrived late. My portfolio fell more than the market generally because I have been favouring what you could call "aggressive recovery plays".
I subscribed to the rights issue of Barratts, the house builder, and bought some extra shares into the bargain. I reckoned the price had been depressed by the rights issue and would rise when all the money was secured. I bought at 153p, only to see the shares fall back even further – to 122p.
I bought more Enterprise Inns, the pub owner, too, paying 139.9p. The shares had jumped 20p after the Office for Fair Trading said it has not found evidence that companies such as Enterprise Inns, which require their tenants to buy their beer, are reducing competition in a way that damages consumers.
This removed one of a little pile of concerns that has been weighing down the shares. I was hoping that as these various concerns were dealt with or found not to be quite so bad as feared that the price would float nearer to its net asset value. Instead, the shares fell more than most and traded around 118p this week.
I also recently bought a few shares in Indo-China Capital Vietnam Holdings at US$4.54. I like Vietnam, but did not quite realise when buying that the company seems to be winding itself down.
I also bought a few Real Estate Investors, a small property company, at 4.96p. I had noticed some director buying and, on looking into the detail, liked the look of it.
Finally, I bought a small holding Chaoda Modern Agriculture, an agribusiness quoted in Hong Kong. Chaoda grows vegetables, fruit and tea and sells to supermarkets and abroad. I bought at HK$6.33.
So I bought up to the hilt. All my cash was gone and most of my bonds, making me 95pc invested in shares or even more if you count my mortgage as financing my shares which is about right. Thus, by the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
I can't give a precise figure because my curiosity about exact changes in my portfolio's value dwindles when I am losing money.
And this is without counting my shares in Aero Inventory, which have been suspended, as I write, because the company had a problem with valuing, ahem, its inventory.
What now? I still believe November to Christmas and beyond is generally good for shares. David Schwartz, who looks at stock market statistics, has said there has not been much evidence of a seasonal trend this millennium.
It is possible something has changed or that the trend has become self-defeating as people try to get ahead of it. But, even on recent figures, shares have risen in more than half the November-to-March periods. I think there is some unknown force that tries to sustain the market. And I still think some of my shares are excellent value.
In the case of Barratt, I am encouraged by recent experiences of the property market. I am an executor of my uncle's estate. We put his house on the market and within three days agents had taken 42 people to it and we had an offer at the asking price. I am also an executor of another estate, where three potential buyers were vying for the house.
As for the stock market, the Bank of England has decided to do another £50bn of quantitative easing. I think and hope this should help keep shares out of trouble for a while at least.
http://www.telegraph.co.uk/finance/personalfinance/investing/6498737/Diary-of-a-Private-Investor-My-aggressive-investment-strategy-has-backfired.html
Gold: how high can the price go?
Gold has reached an all-time high, breaking through the $1,100 an ounce barrier on a weaker US dollar and the continued appetite from investors for the precious metal's safe-haven attributes.
Published: 2:51PM GMT 10 Nov 2009
Demand continues to be strong – even Harrods, the famous Knightsbridge store, is getting in on the act by selling gold bars and coins to its upmarket customers.
Gold has returned more than 20pc over the past year but the question remains: how high can the price of gold go?
Here are the thoughts of analysts taken from around the globe.
Suki Cooper, commodities analyst, Barclays Capital
Ms Cooper said: “We expect prices to maintain their upward momentum through to at least the first half of 2010, where we expect prices to average $1,140 in the second quarter. The unexpected purchase of gold by the Reserve Bank of India has only added to the positive sentiment towards gold. Even though gold's attributes have not changed, we have seen a change in attitude from investors towards gold. From the official sector through to retail investors, there has been a structural shift in the demand side.”
Jim Rogers, chairman of Singapore-based Rogers Holdings
Mr Rogers argues that gold hasn't begun to peak, adding that it will climb from a nominal record near $1,100 an ounce to $2,000 an ounce in the future. He said: “Just to get back to the old high back in 1980, adjusted for inflation, the price would need to be over $2,000 now. So we’ll certainly get there some time in the next decade.”
London Bullion Market Association
A poll of about 370 delegates at the London Bullion Market Association's annual conference predicted that gold would be at $1,181 in 12 months' time. The poll covered 368 traders, analysts, miners and central bankers.
Ellison Chu, Standard Bank Asia
The Hong Kong based manager of precious metals at the bank expects the price of gold to maintain four-figure levels given the strong demand, particularly from Asia.
"India's purchase [India’s central bank recently bought 200 tonnes of gold] had a psychological impact on investors. They think other central banks will also buy gold for their reserves. Gold will probably hang on to these high levels. We're seeing good seasonal demand ahead of Christmas and the Chinese New Year."
Nouriel Roubini, professor of economics at New York University’s Stern School of Business
In an interview with Hard Assets Investor, Mr Roubini said there were only two scenarios that would see gold go much higher: inflation and Armageddon.
“We don’t have Armageddon, we don’t have inflation, so gold can maybe go slightly higher. But those people who delude themselves that gold can go to $1,500 or $2,000 are just talking nonsense. The fundamentals are not justified, and those people are just talking their books.”
David Levenstein, investment adviser
Writing on Mineweb, David Levenstein, a veteran of 29 years in futures, equities, forex and bullion, said gold appeared to be on course for a shift to $1,300 because of the gloomy outlook for the dollar.
"Frankly, I cannot see any bit of news that may suddenly appear that could have a miraculously powerful effect on the value of the dollar," he wrote. "While my experience has taught me that it is very difficult to predict future prices, all the empirical evidence tends to indicate that we can expect much higher prices for gold."
Bill Downey, investor and price analyst
“Cycles suggest we are nearing a pullback. We have arrived at a key resistance area at a time when key cycles are due. We're modifying key resistance to $1,105-$1,110 followed by $1,132-$1,150. The potential for a high to be established this week and an autumn correction unfolding thereafter has grown significantly. We want to see at least a bit of price weakness first ... but longs [those who hold gold] should be cautious.”
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/6537637/Gold-how-high-can-the-price-go.html
Tuesday 10 November 2009
****Determining the value of a business is one of the most difficult aspects of any transaction
VALUING THE BUSINESS
Introduction
After deciding to buy or sell a business, the subject of "how much" becomes important. Determining the value of a business is one of the most difficult aspects of any transaction, since every business is unique.
A common misconception is that valuation is an exact science. While the use of formulas in a valuation implies exactness, it is very difficult to set the worth of a company at a single figure. To establish a fair market value, "hard" figures, such as assets, liabilities, and historical earnings and cash flow are used. But "soft," or subjective, figures, such as projected earnings, future cash flow, and the value of intangibles (e.g., patents, know-how, the quality of management, and leases at below-market rates) are also used. Soft figures also include such considerations as current market conditions, industry popularity, and, most important, the objectives of the seller or buyer. With all this subjectivity, fair market value can be, at best, only a range of estimates.
A second misconception is that value equals selling price. The final selling price can be either higher or lower than the estimated range of values for the company, depending on the eagerness of the buyer to buy and the seller to sell, the demand for the type of company, the
form of consideration paid, the negotiating skills of the parties, etc. In fact, the selling price of a company sometimes does not seem to have much relation to its estimated value.
Ask appraisers the value of your business and they will respond, "What's the purpose of the valuation?" Valuation methods -- and therefore values -- vary depending on the reason for the valuation. Different techniques can be used to arrive at different values, and each of the values may be correct for a specific situation. For purposes of this discussion, we will focus on the valuation techniques used for buying or selling a company as a going concern. Whichever technique is used, the valuation comprises these key elements:
Gathering Information
The selling memorandum, the basis for the buyers preliminary examination of the company, should contain comprehensive information about the company, its history and operations, and its market position. As a buyer, you will continue gathering all the information you can about the company through such sources as management interviews and conversations with the company's vendors and customers.
You will also want to gather similar information about competitors of similar size. In addition, you may want general information about the industry and the industry's leaders to help you understand market trends, competitive strategies, and the dynamics that cause companies in this particular industry to grow and succeed. Potential sources for industry and competitor information include market studies, reports of trade associations and credit rating agencies, and annual reports and stock analysts' reports of publicly owned companies.
Recasting Financial Statements
The historical financial statements may need to be adjusted to make them more meaningful or to compare them with those of the company's competitors. For example, take the financial statements of a closely held or family business whose objective in years past has been to minimize earnings in order to minimize corporate income taxes. To achieve this, the company may have awarded unusually large bonuses to employee-owners, masking the "true" earning power of the company. As the buyer or seller, you would want to recast, or normalize, the financial statements to account for this type of activity. In valuing a business, some typical income statement adjustments may include the following:
· Excessive management salaries.
· Salaries paid to individuals who can be replaced at much lower salaries.
· Retirement and health plans that provide better benefits than the plans of other companies in the industry.
· Excessive perquisites, such as company cars and club memberships.
· Favorable or unfavorable leases.
· Last-in-first-out (LIFO) inventory adjustments.
· Interest rates if the buyer borrows at significantly different rates.
· Adjustment of sales to reflect selling price increases, in cases where prices have not been increased recently and such increases would not have affected sales levels.
· Nonrecurring expenses, such as legal expenditures, relocation costs, and casualty losses.
· Accelerated depreciation charges, utilized to reduce taxable income.
· "Window dressing," or practices that temporarily improve current earnings. For instance, a company might reduce necessary long-term investments, such as research, advertising, or maintenance, improving its current earnings but weakening its potential for future earnings.
· Tax rates. If the company has an unusual tax situation, e.g., available net operating loss (NOL) carry forwards, an adjustment should be made to reflect "normal" taxation.
In valuing a business, some typical balance sheet adjustments may include the following:
· LIFO reserves, to adjust the inventory to current cost.
· Undervalued or overvalued marketable securities and investments in unconsolidated subsidiaries.
· Fixed assets that have appreciated in value.
· Intangible assets that may not be recorded on the books.
· Beneficial leases.
· Assumable debt with favorable interest rates or repayment terms.
· Unrecorded pension and other postretirement liabilities.
· Contingent liabilities.
After identifying and quantifying applicable adjustments, you will have a more meaningful set of financial statements to use to make financial projections and to compare the company's performance with that of other companies.
Projecting Earnings
Prospective financial information should be prepared for the next three to five years. If you are the seller, you probably have already prepared this information for your own purposes and included portions of it in the selling memorandum. If you are the buyer, however, chances are that you will want to do your own analysis. Prospective earnings may be estimated in one of three ways:
1. Use an average annual growth rate derived from the past three to five years' income as an estimate of future annual earnings. This method assumes that the earnings trend will remain essentially unchanged and, therefore, that historical earnings are a valid indicator
of future performance. The major disadvantage of using average historical growth rates is that past conditions may not remain the same in the future. Because business conditions are constantly changing, you should adjust for known and anticipated changes.
2. Use an estimate of future earnings under the current owners' management, adjusting for inflation and industry trends. This method of defining future earnings assumes that, after the sale, management will continue to operate the company in the same manner as past
management and with the same degree of success.
3. Use an estimate of future earnings under the new owners' management, adjusting for inflation and industry trends. This method is probably most useful to the buyer. It analyzes the effect that new management or strategies will have on future earnings. These effects include changes in marketing strategy, manufacturing technology, and management philosophy.
Comparisons with the Industry
Before proceeding to the valuation, the company's results, as restated, should be compared with the results of other companies in the industry and with the industry in general. Some of the comparative analysis should focus on the following figures:
· Sales growth.
· Gross margin.
· Earnings before income taxes, as a percentage of sales.
· Earnings before interest and income taxes, as a percentage of sales (this eliminates the financing bias)
· Earnings before depreciation, interest, and income tax, as a percentage of sales (this eliminates the historical cost bias as well as the financing bias).
· Return on equity
· Return on assets.
· Current ratio.
· Receivables and inventory turnover rates.
· Debt to net worth ratio
· Interest coverage.
Does the company under perform or outperform similar companies and the industry averages?
What is its growth rate relative to the industries?
Is it gaining or losing market share?
This analysis will give you some idea of whether the company deserves a premium or discount over the value of comparable companies. Wide fluctuations from the industry averages should be explained because they may indicate errors in the underlying data.
Valuation Method
The valuation method you select will be determined by your objectives for the valuation. As the seller, the objective is fairly clear -- to get the most for the company. As the buyer, however, your objective may not be as straightforward. It is important that you understand what you are buying and why you are buying it. The price you pay for an ongoing business may be quite different from the price you pay for a business that you intend to cannibalize for certain product lines or markets. For each purchase, a different valuation method may be appropriate.
Three approaches are commonly used in valuing a closely held business.
Balance Sheet Methods
Balance sheet methods of valuation are based on the concept that a buyer basically purchases the net assets of the company. Book value is probably the easiest method to apply. Using the company's financial statements, book value is simply calculated by subtracting total liabilities from total assets. The advantage of this method is that the numbers are usually readily available. Its drawbacks are numerous,
however. Book value does not reflect the fair market value of assets and liabilities; it expresses historical value only and is significantly affected by the company's accounting practices. It may not record, or may significantly undervalue, intangible assets such as patents and trademarks.
Lastly, book value ignores earnings potential. Despite these drawbacks, book value can be a useful point of reference when considering asset valuation.
Adjusted book value is simply the book value adjusted for major differences between the stated book value and the fair market value of the company's assets and liabilities. A refinement of book value, adjusted book value more accurately represents the value of a company's assets, but still has many of the same drawbacks.
One of the most significant typical balance sheet adjustments is the adjustment of the value of a company's intangible assets. This is also one of the most difficult. What is the value of an "ongoing" business? If a company has patents, trademarks, copyrights, or a proprietary
manufacturing process, how much are they worth? How much would it cost to develop similar processes, and could legal action result if the developed process were found to be too similar to a competitor's? What is the value of a company's existing customer base, long-term contracts, or exclusive license agreements? If you started a similar company tomorrow, how many months of losses would you have to incur before sales would reach profitable levels? Such questions make balance sheet methods a less effective measurement of business values for ongoing companies.
Despite these shortcomings, balance sheet methods have an appropriate place. For companies that are dependent on income-producing assets, such as real estate companies, banks, or leasing companies, balance sheet methods may provide the most reasonable valuation.
A less used balance sheet method is liquidation value. Liquidation value estimates the cash remaining after the company has sold all its assets and paid off all its liabilities. This method assumes that a bulk sale takes place, and therefore many of the prices you would get for the assets are lower than "fair market value." The liquidation may be orderly or forced, depending on the circumstances. In practice, only a business that is in severe financial difficulty or one that must be sold quickly (e.g., the owner has an immediate need for cash or a government order to sell has been issued) can be purchased at liquidation value. However, it is important to know this value during your negotiations. Financial institutions commonly use this method to determine the value of assets used as collateral to secure financing.
In applying any of the balance sheet methods, be alert to unrecorded liabilities that affect net asset value, such as noncancelable leases (if you intend to move), severance costs (if you are considering layoffs), or unfunded pension liabilities and other retiree benefits.
Market Comparables
This method determines a company's value by comparing the company with a similar public company or with recently sold similar businesses. While quite common in real estate transactions, this method is difficult to apply to most businesses because of the difficulty of
finding comparable businesses or transactions.
When suitable companies can be found, the price-earnings ratio of the comparable company (its stock price divided by its after-tax earnings per share) is typically used to determine value. Thus, if the stock of a comparable business trades in the public market at a price-earnings ratio of 12, the value of the candidate can be assumed to be 12 times its earnings.
Even if comparable companies can be found, this method is difficult to implement. Public companies are often engaged in diversified practices so that the price-earnings ratios may not be relevant. And since the companies are not identical, you must also consider whether your company should command a premium or discount. Possible price adjustments include the following:
· A premium for having anticipated earnings growth greater than expected industry norms.
· A discount for the additional risk of not enjoying the same liquidity as publicly traded stock. This adjustment could reduce the value by as much as30 to 50 percent for lack of marketability.
· A premium for acquiring control. If you want to acquire a controlling interest, you may need to pay a hefty premium to encourage other stockholders to sell their interest. This occurs frequently in both hostile and friendly takeovers. The premium can be quite substantial (40 to 50percent).
· Small Company discount. If your company is smaller than the average company in your industry, expect the buyer to use a price multiple for your company that is lower than the price multiples applicable to the market leader and other companies in your industry. This adjustment could reduce the value by as much as 30 percent. Despite these shortcomings, market comparables are very useful as reference points from which to value your company.
Earnings Methods
Various approaches are used to value future earnings power. Three of the more common approaches are capitalized earnings, discounted future earnings, and discounted cash flow. Capitalized earnings can be quickly computed and are often used to make preliminary estimates of value. They are calculated based on annual after-tax income. In using this method for valuing a company, you first determine your desired rate of return. The initial investment or value is then computed by dividing the average after-tax earnings by the desired rate of return. The major disadvantage of this method is that it does not take into account the time value of money. In addition, it assumes that the most recent earnings are a valid indicator of future performance.
VALCO, Inc.: Capitalized Earnings Method of Valuation
(Dollar amounts in thousands)
Assumptions:
After-tax income for the most recent year $750
Desired rate of return on investment 15%
Calculation of capitalized earnings:
Divide Income by rate of return
$750/.15=$5,000
The discounted future earnings method initially requires an estimate of after-tax income for future years (generally five to ten years), an estimate of value at the end of this future period ("residual value"), and the investor's desired rate of return. Each year's income and the residual value are then discounted (the process of dividing sums to be received in the future by an assumed earnings rate) by the desired rate of return. The sum of these discounted values is the estimated value (present value) of the company.
The inherent advantage of the discounted future earnings approach is that future earnings potential becomes the investment criterion, taking into account the time value of money.
Disadvantages include the fact that, like any estimate, future earnings cannot be projected with certainty. Residual value, which may be affected by industry and economic uncertainties, the buyer's intent, and other factors, is also difficult to project. Finally, it may not be possible to reinvest all earnings because of practical limitations imposed by the business environment and because earnings do not necessarily take the form of cash.
The first two disadvantages can be overcome to some extent by using computing models based on optimistic, pessimistic, and most-likely outcomes for future earnings and residual value. The last disadvantage can be overcome by using the discounted cash flow method. This method is essentially the same as the discounted future earnings method, except that cash flow rather than income is projected for each future year. Many consider this method the best for determining value. In many cases cash flow is a more important consideration than profits, as in the case of a heavily leveraged transaction.
Determining the Final Value
The buyer and seller will each conduct their own analysis to estimate the future earnings and cash flows and assess their own risk tolerance in order to estimate the company's value. For example, the buyer may feel this is a moderately risky opportunity requiring a 15 percent aftertax return to compete with other available investment opportunities. As the perceived risk increases, so does the discount rate, which reduces the current value of the company. The seller, on the other hand, may determine that his or her next best investment opportunity will yield a maximum after-tax return of 10 percent, and he or she will require a similar discount to sell this business. In valuing the business, the buyer's and seller's results can be significantly different.
The parties should not spend much time arguing about the mechanics of how they arrived at their valuations other than to understand the assumptions and techniques used. Since they each have different views on risk, growth, etc., there is little point in trying to agree on "value."
Use your value as a guide for developing your negotiating strategy. As the buyer, your value will be the maximum price that makes sense taking into account the perceived riskiness of the transaction and the funding available to you. As the seller, your value will be the minimum you are willing to accept considering your alternative uses for the funds from the sale.
For more resources to Start or Grow Small Business, visit our website at http://www.womensenterprise.ca/ or call 1.800.643.7014
http://www.womensenterprise.ca/resources/downloads/valuing-business.pdf
Introduction
After deciding to buy or sell a business, the subject of "how much" becomes important. Determining the value of a business is one of the most difficult aspects of any transaction, since every business is unique.
A common misconception is that valuation is an exact science. While the use of formulas in a valuation implies exactness, it is very difficult to set the worth of a company at a single figure. To establish a fair market value, "hard" figures, such as assets, liabilities, and historical earnings and cash flow are used. But "soft," or subjective, figures, such as projected earnings, future cash flow, and the value of intangibles (e.g., patents, know-how, the quality of management, and leases at below-market rates) are also used. Soft figures also include such considerations as current market conditions, industry popularity, and, most important, the objectives of the seller or buyer. With all this subjectivity, fair market value can be, at best, only a range of estimates.
A second misconception is that value equals selling price. The final selling price can be either higher or lower than the estimated range of values for the company, depending on the eagerness of the buyer to buy and the seller to sell, the demand for the type of company, the
form of consideration paid, the negotiating skills of the parties, etc. In fact, the selling price of a company sometimes does not seem to have much relation to its estimated value.
Ask appraisers the value of your business and they will respond, "What's the purpose of the valuation?" Valuation methods -- and therefore values -- vary depending on the reason for the valuation. Different techniques can be used to arrive at different values, and each of the values may be correct for a specific situation. For purposes of this discussion, we will focus on the valuation techniques used for buying or selling a company as a going concern. Whichever technique is used, the valuation comprises these key elements:
- gathering information about the company and the industry;
- recasting the historical financial statements;
- preparing prospective financial statements;
- comparing the company's results with those of other companies in the industry; and,
- finally, applying appropriate valuation methodologies.
Gathering Information
The selling memorandum, the basis for the buyers preliminary examination of the company, should contain comprehensive information about the company, its history and operations, and its market position. As a buyer, you will continue gathering all the information you can about the company through such sources as management interviews and conversations with the company's vendors and customers.
You will also want to gather similar information about competitors of similar size. In addition, you may want general information about the industry and the industry's leaders to help you understand market trends, competitive strategies, and the dynamics that cause companies in this particular industry to grow and succeed. Potential sources for industry and competitor information include market studies, reports of trade associations and credit rating agencies, and annual reports and stock analysts' reports of publicly owned companies.
Recasting Financial Statements
The historical financial statements may need to be adjusted to make them more meaningful or to compare them with those of the company's competitors. For example, take the financial statements of a closely held or family business whose objective in years past has been to minimize earnings in order to minimize corporate income taxes. To achieve this, the company may have awarded unusually large bonuses to employee-owners, masking the "true" earning power of the company. As the buyer or seller, you would want to recast, or normalize, the financial statements to account for this type of activity. In valuing a business, some typical income statement adjustments may include the following:
· Excessive management salaries.
· Salaries paid to individuals who can be replaced at much lower salaries.
· Retirement and health plans that provide better benefits than the plans of other companies in the industry.
· Excessive perquisites, such as company cars and club memberships.
· Favorable or unfavorable leases.
· Last-in-first-out (LIFO) inventory adjustments.
· Interest rates if the buyer borrows at significantly different rates.
· Adjustment of sales to reflect selling price increases, in cases where prices have not been increased recently and such increases would not have affected sales levels.
· Nonrecurring expenses, such as legal expenditures, relocation costs, and casualty losses.
· Accelerated depreciation charges, utilized to reduce taxable income.
· "Window dressing," or practices that temporarily improve current earnings. For instance, a company might reduce necessary long-term investments, such as research, advertising, or maintenance, improving its current earnings but weakening its potential for future earnings.
· Tax rates. If the company has an unusual tax situation, e.g., available net operating loss (NOL) carry forwards, an adjustment should be made to reflect "normal" taxation.
In valuing a business, some typical balance sheet adjustments may include the following:
· LIFO reserves, to adjust the inventory to current cost.
· Undervalued or overvalued marketable securities and investments in unconsolidated subsidiaries.
· Fixed assets that have appreciated in value.
· Intangible assets that may not be recorded on the books.
· Beneficial leases.
· Assumable debt with favorable interest rates or repayment terms.
· Unrecorded pension and other postretirement liabilities.
· Contingent liabilities.
After identifying and quantifying applicable adjustments, you will have a more meaningful set of financial statements to use to make financial projections and to compare the company's performance with that of other companies.
Projecting Earnings
Prospective financial information should be prepared for the next three to five years. If you are the seller, you probably have already prepared this information for your own purposes and included portions of it in the selling memorandum. If you are the buyer, however, chances are that you will want to do your own analysis. Prospective earnings may be estimated in one of three ways:
1. Use an average annual growth rate derived from the past three to five years' income as an estimate of future annual earnings. This method assumes that the earnings trend will remain essentially unchanged and, therefore, that historical earnings are a valid indicator
of future performance. The major disadvantage of using average historical growth rates is that past conditions may not remain the same in the future. Because business conditions are constantly changing, you should adjust for known and anticipated changes.
2. Use an estimate of future earnings under the current owners' management, adjusting for inflation and industry trends. This method of defining future earnings assumes that, after the sale, management will continue to operate the company in the same manner as past
management and with the same degree of success.
3. Use an estimate of future earnings under the new owners' management, adjusting for inflation and industry trends. This method is probably most useful to the buyer. It analyzes the effect that new management or strategies will have on future earnings. These effects include changes in marketing strategy, manufacturing technology, and management philosophy.
Comparisons with the Industry
Before proceeding to the valuation, the company's results, as restated, should be compared with the results of other companies in the industry and with the industry in general. Some of the comparative analysis should focus on the following figures:
· Sales growth.
· Gross margin.
· Earnings before income taxes, as a percentage of sales.
· Earnings before interest and income taxes, as a percentage of sales (this eliminates the financing bias)
· Earnings before depreciation, interest, and income tax, as a percentage of sales (this eliminates the historical cost bias as well as the financing bias).
· Return on equity
· Return on assets.
· Current ratio.
· Receivables and inventory turnover rates.
· Debt to net worth ratio
· Interest coverage.
Does the company under perform or outperform similar companies and the industry averages?
What is its growth rate relative to the industries?
Is it gaining or losing market share?
This analysis will give you some idea of whether the company deserves a premium or discount over the value of comparable companies. Wide fluctuations from the industry averages should be explained because they may indicate errors in the underlying data.
Valuation Method
The valuation method you select will be determined by your objectives for the valuation. As the seller, the objective is fairly clear -- to get the most for the company. As the buyer, however, your objective may not be as straightforward. It is important that you understand what you are buying and why you are buying it. The price you pay for an ongoing business may be quite different from the price you pay for a business that you intend to cannibalize for certain product lines or markets. For each purchase, a different valuation method may be appropriate.
Three approaches are commonly used in valuing a closely held business.
- The first approach uses the balance sheet to arrive at the fair value of net assets;
- the second examines market comparables; and
- the third analyzes the future income or potential cash flow of the company.
Balance Sheet Methods
Balance sheet methods of valuation are based on the concept that a buyer basically purchases the net assets of the company. Book value is probably the easiest method to apply. Using the company's financial statements, book value is simply calculated by subtracting total liabilities from total assets. The advantage of this method is that the numbers are usually readily available. Its drawbacks are numerous,
however. Book value does not reflect the fair market value of assets and liabilities; it expresses historical value only and is significantly affected by the company's accounting practices. It may not record, or may significantly undervalue, intangible assets such as patents and trademarks.
Lastly, book value ignores earnings potential. Despite these drawbacks, book value can be a useful point of reference when considering asset valuation.
Adjusted book value is simply the book value adjusted for major differences between the stated book value and the fair market value of the company's assets and liabilities. A refinement of book value, adjusted book value more accurately represents the value of a company's assets, but still has many of the same drawbacks.
One of the most significant typical balance sheet adjustments is the adjustment of the value of a company's intangible assets. This is also one of the most difficult. What is the value of an "ongoing" business? If a company has patents, trademarks, copyrights, or a proprietary
manufacturing process, how much are they worth? How much would it cost to develop similar processes, and could legal action result if the developed process were found to be too similar to a competitor's? What is the value of a company's existing customer base, long-term contracts, or exclusive license agreements? If you started a similar company tomorrow, how many months of losses would you have to incur before sales would reach profitable levels? Such questions make balance sheet methods a less effective measurement of business values for ongoing companies.
Despite these shortcomings, balance sheet methods have an appropriate place. For companies that are dependent on income-producing assets, such as real estate companies, banks, or leasing companies, balance sheet methods may provide the most reasonable valuation.
A less used balance sheet method is liquidation value. Liquidation value estimates the cash remaining after the company has sold all its assets and paid off all its liabilities. This method assumes that a bulk sale takes place, and therefore many of the prices you would get for the assets are lower than "fair market value." The liquidation may be orderly or forced, depending on the circumstances. In practice, only a business that is in severe financial difficulty or one that must be sold quickly (e.g., the owner has an immediate need for cash or a government order to sell has been issued) can be purchased at liquidation value. However, it is important to know this value during your negotiations. Financial institutions commonly use this method to determine the value of assets used as collateral to secure financing.
In applying any of the balance sheet methods, be alert to unrecorded liabilities that affect net asset value, such as noncancelable leases (if you intend to move), severance costs (if you are considering layoffs), or unfunded pension liabilities and other retiree benefits.
Market Comparables
This method determines a company's value by comparing the company with a similar public company or with recently sold similar businesses. While quite common in real estate transactions, this method is difficult to apply to most businesses because of the difficulty of
finding comparable businesses or transactions.
When suitable companies can be found, the price-earnings ratio of the comparable company (its stock price divided by its after-tax earnings per share) is typically used to determine value. Thus, if the stock of a comparable business trades in the public market at a price-earnings ratio of 12, the value of the candidate can be assumed to be 12 times its earnings.
Even if comparable companies can be found, this method is difficult to implement. Public companies are often engaged in diversified practices so that the price-earnings ratios may not be relevant. And since the companies are not identical, you must also consider whether your company should command a premium or discount. Possible price adjustments include the following:
· A premium for having anticipated earnings growth greater than expected industry norms.
· A discount for the additional risk of not enjoying the same liquidity as publicly traded stock. This adjustment could reduce the value by as much as30 to 50 percent for lack of marketability.
· A premium for acquiring control. If you want to acquire a controlling interest, you may need to pay a hefty premium to encourage other stockholders to sell their interest. This occurs frequently in both hostile and friendly takeovers. The premium can be quite substantial (40 to 50percent).
· Small Company discount. If your company is smaller than the average company in your industry, expect the buyer to use a price multiple for your company that is lower than the price multiples applicable to the market leader and other companies in your industry. This adjustment could reduce the value by as much as 30 percent. Despite these shortcomings, market comparables are very useful as reference points from which to value your company.
Earnings Methods
Various approaches are used to value future earnings power. Three of the more common approaches are capitalized earnings, discounted future earnings, and discounted cash flow. Capitalized earnings can be quickly computed and are often used to make preliminary estimates of value. They are calculated based on annual after-tax income. In using this method for valuing a company, you first determine your desired rate of return. The initial investment or value is then computed by dividing the average after-tax earnings by the desired rate of return. The major disadvantage of this method is that it does not take into account the time value of money. In addition, it assumes that the most recent earnings are a valid indicator of future performance.
VALCO, Inc.: Capitalized Earnings Method of Valuation
(Dollar amounts in thousands)
Assumptions:
After-tax income for the most recent year $750
Desired rate of return on investment 15%
Calculation of capitalized earnings:
Divide Income by rate of return
$750/.15=$5,000
The discounted future earnings method initially requires an estimate of after-tax income for future years (generally five to ten years), an estimate of value at the end of this future period ("residual value"), and the investor's desired rate of return. Each year's income and the residual value are then discounted (the process of dividing sums to be received in the future by an assumed earnings rate) by the desired rate of return. The sum of these discounted values is the estimated value (present value) of the company.
The inherent advantage of the discounted future earnings approach is that future earnings potential becomes the investment criterion, taking into account the time value of money.
Disadvantages include the fact that, like any estimate, future earnings cannot be projected with certainty. Residual value, which may be affected by industry and economic uncertainties, the buyer's intent, and other factors, is also difficult to project. Finally, it may not be possible to reinvest all earnings because of practical limitations imposed by the business environment and because earnings do not necessarily take the form of cash.
The first two disadvantages can be overcome to some extent by using computing models based on optimistic, pessimistic, and most-likely outcomes for future earnings and residual value. The last disadvantage can be overcome by using the discounted cash flow method. This method is essentially the same as the discounted future earnings method, except that cash flow rather than income is projected for each future year. Many consider this method the best for determining value. In many cases cash flow is a more important consideration than profits, as in the case of a heavily leveraged transaction.
Determining the Final Value
The buyer and seller will each conduct their own analysis to estimate the future earnings and cash flows and assess their own risk tolerance in order to estimate the company's value. For example, the buyer may feel this is a moderately risky opportunity requiring a 15 percent aftertax return to compete with other available investment opportunities. As the perceived risk increases, so does the discount rate, which reduces the current value of the company. The seller, on the other hand, may determine that his or her next best investment opportunity will yield a maximum after-tax return of 10 percent, and he or she will require a similar discount to sell this business. In valuing the business, the buyer's and seller's results can be significantly different.
The parties should not spend much time arguing about the mechanics of how they arrived at their valuations other than to understand the assumptions and techniques used. Since they each have different views on risk, growth, etc., there is little point in trying to agree on "value."
Use your value as a guide for developing your negotiating strategy. As the buyer, your value will be the maximum price that makes sense taking into account the perceived riskiness of the transaction and the funding available to you. As the seller, your value will be the minimum you are willing to accept considering your alternative uses for the funds from the sale.
For more resources to Start or Grow Small Business, visit our website at http://www.womensenterprise.ca/ or call 1.800.643.7014
Wood Market on Path to Recovery
http://myinvestingnotes.blogspot.com/2009/11/wood-market-picks-up-speed-in-vietnam.html
In May 2009, the U.S. economy also showed signs of recovery, and the housing market warmed up. Encouraging signals also emerged in Japan and Europe in July and August 2009. Therefore, Vietnam’s export revenue has fared better and posted month-on-month increase since May. At present, wood processing enterprises have received many orders. These indicate that Vietnam’s wood processing sector is on the path to recovery.
In May 2009, the U.S. economy also showed signs of recovery, and the housing market warmed up. Encouraging signals also emerged in Japan and Europe in July and August 2009. Therefore, Vietnam’s export revenue has fared better and posted month-on-month increase since May. At present, wood processing enterprises have received many orders. These indicate that Vietnam’s wood processing sector is on the path to recovery.
VALUING TECHNOLOGY BUSINESSES
One of the most important questions for any business owner is “What’s my business worth?” to which, the stock answer is “It depends.” This paper explains the factors affecting the valuation of a business. This is useful not only when selling a company, but also when bringing in new investors who buy a piece of the company.
Valuation thoughts and concepts
The fundamentals underlying the valuation of a business are no different than those for other things we buy and sell such are houses, cars, old furniture, etc.
Value is:
- Based on perception: “Beauty is in the eye of the beholder.” A house that one person perceives needs a lot of work is a “fixer upper” to someone else who sees an opportunity to turn his sweat into profit. The same exists for businesses.
- Personal: “What is it worth to me.” A 1957 Chevy has more value to someone for whom this brings back fond memories than to someone who sees an old car with a rough engine and no air conditioning. A business is worth more to someone who has successfully run similar enterprises.
- Relative: “Different values for different people”. Closing a sale (both parties agreeing to a value) is as much an art as a science. It is a matter of both parties seeing benefit in making the deal.
Read on:
http://www.corp21.com/Valuation.pdf
Valuation thoughts and concepts
The fundamentals underlying the valuation of a business are no different than those for other things we buy and sell such are houses, cars, old furniture, etc.
Value is:
- Based on perception: “Beauty is in the eye of the beholder.” A house that one person perceives needs a lot of work is a “fixer upper” to someone else who sees an opportunity to turn his sweat into profit. The same exists for businesses.
- Personal: “What is it worth to me.” A 1957 Chevy has more value to someone for whom this brings back fond memories than to someone who sees an old car with a rough engine and no air conditioning. A business is worth more to someone who has successfully run similar enterprises.
- Relative: “Different values for different people”. Closing a sale (both parties agreeing to a value) is as much an art as a science. It is a matter of both parties seeing benefit in making the deal.
Read on:
http://www.corp21.com/Valuation.pdf
Valuing uncertainty
Valuing uncertainty
Author: Andrew Kent on 26 February 2009
A key issue with business valuations is the level of certainty that can be placed on future earnings. The optimistic seller wants potential growth factored into the numbers, while the pessimistic buyer would like to exclude anything that customers are not contractually committed to. With this in mind one may wonder how any transactions occur at all. Fortunately not all sellers are optimistic and not all buyers are pessimistic; indeed when the sellers are pessimistic and the buyers are optimistic, both walk away happy with the deal.
However the majority of business sales involve people who basically want a fair deal - they might fear being ripped off, they might hope for a great deal, but they generally expect a fair deal.
The issue that makes both sides feel uncomfortable is determining what a genuinely fair deal is. The underlying problem is that what is being sold is the future of the business, not its past. As the future is uncertain, so is the value of the business.
To this end, a source of comfort becomes what other people have paid for similar businesses. This can be found at http://www.valuemybusiness.com.au/ and can also be obtained from advisers and brokers that specialise in specific industries.
What many business owners find difficult to understand is why the sale value and the book value of the business are not the same thing. The fact is that these have never been the same.
Historically the difference in value has been catered for by adding a figure for goodwill if the sale price is higher than the book value. Alternately, if the sale price is lower than the book value, then the asset values are adjusted down through write-offs.
The reason that the sale value and the book value are different is because the book value is based on the businesses past, while the sale value is based on the businesses future.
In today's market, there is a strong move away from discussions of goodwill and asset prices to a focus on EBIT and EBIT multiples. A key reason for this is that the asset structure of most businesses has fundamentally changed from owning property, plant and equipment to leasing it.
As a result many businesses have ongoing liabilities that exceed their debtors and forward orders. This is not because a business is in bad shape, but rather a reflection of the timeframe for the lease commitment exceeds the timeframes for sales commitments.
So the key discussion point and negotiating point will be around the sale forecast.
Anyone in business today knows that the horizon of certainty on a sales forecast is shorter than it has ever been, so what value will you place on what is beyond the horizon?
http://www.smartcompany.com.au/selling-your-business/valuing-uncertainty.html
Author: Andrew Kent on 26 February 2009
A key issue with business valuations is the level of certainty that can be placed on future earnings. The optimistic seller wants potential growth factored into the numbers, while the pessimistic buyer would like to exclude anything that customers are not contractually committed to. With this in mind one may wonder how any transactions occur at all. Fortunately not all sellers are optimistic and not all buyers are pessimistic; indeed when the sellers are pessimistic and the buyers are optimistic, both walk away happy with the deal.
However the majority of business sales involve people who basically want a fair deal - they might fear being ripped off, they might hope for a great deal, but they generally expect a fair deal.
The issue that makes both sides feel uncomfortable is determining what a genuinely fair deal is. The underlying problem is that what is being sold is the future of the business, not its past. As the future is uncertain, so is the value of the business.
To this end, a source of comfort becomes what other people have paid for similar businesses. This can be found at http://www.valuemybusiness.com.au/ and can also be obtained from advisers and brokers that specialise in specific industries.
What many business owners find difficult to understand is why the sale value and the book value of the business are not the same thing. The fact is that these have never been the same.
Historically the difference in value has been catered for by adding a figure for goodwill if the sale price is higher than the book value. Alternately, if the sale price is lower than the book value, then the asset values are adjusted down through write-offs.
The reason that the sale value and the book value are different is because the book value is based on the businesses past, while the sale value is based on the businesses future.
In today's market, there is a strong move away from discussions of goodwill and asset prices to a focus on EBIT and EBIT multiples. A key reason for this is that the asset structure of most businesses has fundamentally changed from owning property, plant and equipment to leasing it.
As a result many businesses have ongoing liabilities that exceed their debtors and forward orders. This is not because a business is in bad shape, but rather a reflection of the timeframe for the lease commitment exceeds the timeframes for sales commitments.
So the key discussion point and negotiating point will be around the sale forecast.
Anyone in business today knows that the horizon of certainty on a sales forecast is shorter than it has ever been, so what value will you place on what is beyond the horizon?
http://www.smartcompany.com.au/selling-your-business/valuing-uncertainty.html
3 Business Valuation Methods
3 Business Valuation Methods
How to Determine What Your Business Is Worth
By Susan Ward, About.com
Definition Valuation
How much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet.
Let me say up front that I do not believe that business owners should do their own business valuation. This is too much like asking a mother how talented her child is. Neither the business owner nor the mother has the necessary distance to step back and answer the question objectively.
So to ensure that you set and get the best price when you're selling a business, I recommend getting a business valuation done by a professional, such as a Chartered Business Valuator (CBV). In Canada, you can find Business Valuators through the yellow pages or through the website of the Canadian Institute of Chartered Business Valuators.
A Business Valuator (or anyone valuating your business) will use a variety of business valuation methods to determine a fair price for your business, such as:
1) Asset-based approaches
Basically these business valuation methods total up all the investments in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis.
•A going concern asset-based approach lists the business net balance sheet value of its assets and subtracts the value of its liabilities.
•A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.
2) Earning value approaches
These business valuation methods are predicated on the idea that a business's true value lies in its ability to produce wealth in the future. The most common earning value approach is Capitalizing Past Earning.
With this approach, a valuator determines an expected level of cash flow for the company using a company's record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.
Discounted Future Earnings is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor.
What might such capitalization rates be? In a Management Issues paper discussing "How Much Is Your Business Worth?", Grant Thornton LLP suggests:
“Well established businesses with a history of strong earnings and good market share might often trade with a capitalization rate of, say 12% to 20%. Unproven businesses in a fluctuating and volatile market tend to trade at much higher capitalization rates, say 25% to 50%.”
3) Market value approaches
Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.
Although the Earning Value Approach is the most popular business valuation method, for most businesses, some combination of business valuation methods will be the fairest way to set a selling price.
http://sbinfocanada.about.com/od/sellingabusiness/a/bizvaluation.htm
How to Determine What Your Business Is Worth
By Susan Ward, About.com
Definition Valuation
How much your business is worth depends on many factors, from the current state of the economy through your business’s balance sheet.
Let me say up front that I do not believe that business owners should do their own business valuation. This is too much like asking a mother how talented her child is. Neither the business owner nor the mother has the necessary distance to step back and answer the question objectively.
So to ensure that you set and get the best price when you're selling a business, I recommend getting a business valuation done by a professional, such as a Chartered Business Valuator (CBV). In Canada, you can find Business Valuators through the yellow pages or through the website of the Canadian Institute of Chartered Business Valuators.
A Business Valuator (or anyone valuating your business) will use a variety of business valuation methods to determine a fair price for your business, such as:
1) Asset-based approaches
Basically these business valuation methods total up all the investments in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis.
•A going concern asset-based approach lists the business net balance sheet value of its assets and subtracts the value of its liabilities.
•A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.
2) Earning value approaches
These business valuation methods are predicated on the idea that a business's true value lies in its ability to produce wealth in the future. The most common earning value approach is Capitalizing Past Earning.
With this approach, a valuator determines an expected level of cash flow for the company using a company's record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.
Discounted Future Earnings is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor.
What might such capitalization rates be? In a Management Issues paper discussing "How Much Is Your Business Worth?", Grant Thornton LLP suggests:
“Well established businesses with a history of strong earnings and good market share might often trade with a capitalization rate of, say 12% to 20%. Unproven businesses in a fluctuating and volatile market tend to trade at much higher capitalization rates, say 25% to 50%.”
3) Market value approaches
Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.
Although the Earning Value Approach is the most popular business valuation method, for most businesses, some combination of business valuation methods will be the fairest way to set a selling price.
http://sbinfocanada.about.com/od/sellingabusiness/a/bizvaluation.htm
“WHAT IS MY BUSINESS WORTH”?
Valuing a Business
“WHAT IS MY BUSINESS WORTH”?
This is the top question of every business owner when deciding if it is time to sell. Anyone that has ever sold a home knows that an independent appraisal report had to be completed for the mortgage company to complete the sale. A business is many times more complex and usually the single largest asset a person owns. The key to making sound decisions and obtaining full value for your business is to have a viable valuation performed by an independent third-party valuation service. Without this report, a business owner should be prepared for heavy negotiations because it will be your opinion versus the buyer’s opinion.
Be wary of any business broker who prepares his own in-house valuation or tells you “what he can get” for your business. Many times they are simply telling you what they think you want to hear in order to get a listing. In addition, a buyer will place no credibility in that opinion because he has a vested interest in obtaining a higher price than can be justified.
Advanced Business Group uses the services of some of the largest, independent third-party valuation services in America to perform these reports for our clients who are trying to secure full market value for their business. They perform thousands of business valuations each year and have the largest data base of closed transactions in the nation. They know what price other businesses, like yours, are really producing. Their reports are reader friendly and can be shown to prospective buyers. They go much further than just value, they recommend which assets and liabilities to sell and the deal structure that will most likely produce a completed transaction at the best price. On top of that, they will totally justify that the recommended price is best for the business owner and yet realistic for a prospective buyer.
Business brokers have consistently produced higher prices and smoother sales with a valuation than similar businesses produced that did not have the valuation. The reasons are simple:
1) Knowing the value of your business before you go to market allows you to best package and present the company to buyers,
2) Allows us to learn as much as possible about your business without actually working there and thereby being capable of putting your best foot forward when talking with buyers, and
3) Brings a better quality buyer to the table because they know the business has good value.
Valuing a Business-For Other Reasons
Value Enhancement
Divorce
Buy/Sell Agreements
Gift/Estate Tax
ESOPS
Family Succession
Loans/Financing
Life Insurance
Shareholder Disputes
Estate Planning
Partnerships
Mergers
Raising Capital
Business & Strategic Planning
You never have to guess when it comes to something this important.
http://www.businessbuysellvalue.com/ContentPage.aspx?WebPageId=6634&GroupId=1692
“WHAT IS MY BUSINESS WORTH”?
This is the top question of every business owner when deciding if it is time to sell. Anyone that has ever sold a home knows that an independent appraisal report had to be completed for the mortgage company to complete the sale. A business is many times more complex and usually the single largest asset a person owns. The key to making sound decisions and obtaining full value for your business is to have a viable valuation performed by an independent third-party valuation service. Without this report, a business owner should be prepared for heavy negotiations because it will be your opinion versus the buyer’s opinion.
Be wary of any business broker who prepares his own in-house valuation or tells you “what he can get” for your business. Many times they are simply telling you what they think you want to hear in order to get a listing. In addition, a buyer will place no credibility in that opinion because he has a vested interest in obtaining a higher price than can be justified.
Advanced Business Group uses the services of some of the largest, independent third-party valuation services in America to perform these reports for our clients who are trying to secure full market value for their business. They perform thousands of business valuations each year and have the largest data base of closed transactions in the nation. They know what price other businesses, like yours, are really producing. Their reports are reader friendly and can be shown to prospective buyers. They go much further than just value, they recommend which assets and liabilities to sell and the deal structure that will most likely produce a completed transaction at the best price. On top of that, they will totally justify that the recommended price is best for the business owner and yet realistic for a prospective buyer.
Business brokers have consistently produced higher prices and smoother sales with a valuation than similar businesses produced that did not have the valuation. The reasons are simple:
1) Knowing the value of your business before you go to market allows you to best package and present the company to buyers,
2) Allows us to learn as much as possible about your business without actually working there and thereby being capable of putting your best foot forward when talking with buyers, and
3) Brings a better quality buyer to the table because they know the business has good value.
Valuing a Business-For Other Reasons
Value Enhancement
Divorce
Buy/Sell Agreements
Gift/Estate Tax
ESOPS
Family Succession
Loans/Financing
Life Insurance
Shareholder Disputes
Estate Planning
Partnerships
Mergers
Raising Capital
Business & Strategic Planning
You never have to guess when it comes to something this important.
http://www.businessbuysellvalue.com/ContentPage.aspx?WebPageId=6634&GroupId=1692
How To Value A Business
How To Value A Business
By Richard Parker: President of The Business Buyer Resource Center and author of How To Buy A Good Business At A Great Price ©
Accurately valuing a small business is often the most challenging part of the process for prospective business buyers. However, it doesn’t have to be an overwhelming or difficult undertaking. Above all, you should realize that valuation is an art, not a science. As a buyer, always keep in mind that the “Asking Price” is NOT the purchase price. Quite often it does not even remotely represent what the business is truly worth.
Naturally, a buyer’s valuation is usually quite different from what the seller believes their business is worth. Sellers are emotionally attached to their businesses. They usually factor their years of hard work into their calculation. Unfortunately, this has no business whatsoever being in the equation.
The challenge for you, the buyer, is to formulate a valuation that is accurate, and will prove to provide you with an acceptable return on your investment.
There are several ways to calculate the value of a business:
Asset Valuations: Calculates the value of all of the assets of a business and arrives at the appropriate price.
Liquidation Value: Determines the value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months).
Income Capitalization: Future income is calculated based upon historical data and a variety of assumptions.
Income Multiple: The net income (profit/owner's benefit/seller's cash flow) of a business is subject to a certain multiple to arrive at a selling price.
Rules Of Thumb: The selling price of other “like” businesses is used as a multiple of cash flow or a percentage of revenue.
Asset-based valuations do not work for small business purchases. Assets are used to generate revenue and nothing more. If a business is "asset rich" but doesn't make much money, how valuable is the business altogether? Conversely, if a business has limited assets, such as computers and office equipment, but makes a ton of money, isn't it worth more?
Income Capitalization is generally applicable to large businesses and most often uses a factor that is far too arbitrary.
"The key to making good decisions in life is education. There has always been a void in effective buyer educational tools until the course How To Buy A Good Business At A Great Price came along."
The “Rule of Thumb” method is too general. It's hard to find any two businesses that are exactly the same. Valuation must be done based upon what you, as the buyer, can reasonably expect to generate in your pocket, so long as the business’ future is representative of the past historical financial data.
The Multiple Method is clearly the way to go. You have probably heard of businesses selling at “x times earnings”. However, this can be quite subjective because earnings can actually mean different things in different businesses. When buying a small business, every buyer wants to know how much money he or she can expect to make from the business. Therefore, the most effective number to use as the basis of your calculation is what is known as the total “Owner Benefits”.
Note: You will come across different terms on various websites and in business for sale profiles for Owner's Benefit such as Seller's Discretionary Earnings, Adjusted Earnings, and others as well. Make certain that the seller provides you with the exact formula of how they arrived at this figure - this is critical.
The Owner Benefit amount is the total dollars that you can expect to have available from the business (based upon the past financials) to pay yourself a salary, service any debt, and marklet the business assuming that everything remains status quo after you take over. The beauty is that unlike other methods (i.e. Income Cap), it does not attempt to predict the future. Nobody can do that.
(Very Important: Owner's Benefit is not cash flow and cash flow is not profit. Cash Flow is probably the most misunderstood and misused accounting term. Cash Flow is simply the amount of cash a business had at the beginning of a period, how much it had at the end of a period and what happened in between to it.)
The theory behind the Owner Benefit number is to take the business’ profits plus the owner’s salary and benefits and then to add back the non-cash expenses. History has shown that this methodology, while not bulletproof, is the most effective way to establish the valuation basis of a small business. Then, a multiple, based upon a variety of factors, is applied to this number and a valuation is established.
The Owner Benefit formula to use is:
Pre-Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + Depreciation LESS Allowance for Capital Expenditures
Why Add Back Depreciation?
Depreciation is an expense that allows a business to deduct a certain amount of money each year from an asset so that its purchase value is reduced by its overall useful life. As an example: if the business buys a $25,000 truck and its useful life is estimated at 5 years, then each year the company can deduct $5000 off its income to lessen its tax burden. However, as you can see, it is not an actual cash transaction. No money is physically leaving the business or changing hands. Therefore, this amount is added back.
Why Add Back Interest?
Each business owner will have separate philosophies for borrowing for the business and how to best use borrowed funds, if necessary at all. Furthermore, in nearly all cases, the seller will pay off the business’ loans from their proceeds at selling; therefore, you will have use of these additional funds.
A Note About Add-Backs (Capital Expenditure Allowance)
After completing any add-backs, it is critical that you take into consideration the future capital requirements of the business as well as debt-service expenses. As such, in capital-intensive businesses where equipment needs replacing on a regular basis, you must deduct appropriate amounts from the Owner Benefit number in order to determine both the true value of the business as well as its ability to fund future expenditures. Under this formula, you will arrive at a "net" Owner Benefit number or true Free Cash Flow figure.
"I've just completed the purchase of an established business with a 30-year history, now retiring its second owner. Your guide was perfect in helping me select this business, especially in assessing its value. Thanks again for your personal attention to my purchase and pursuits."
Gil Takemori - San Jose, CA
What Multiple?
Typically, small businesses will sell in a one to three-times multiple of this figure. Now, this is a wide range, and some businesses will sell for more, so how do you determine what to apply? The best general rule to keep in mind und is that a one-time multiple is for those businesses where the seller is “the business”. In other words: "as out the door goes the seller, so too can go the customers". Consulting businesses, professional practices, and one-man businesses come to mind.
Businesses that have a strong track record, repeat clients, historical pattern of growth, more than 3 years in business, perhaps some proprietary item, a large customer base, or an exclusive territory, a growing industry, etc., will sell in the three-times ratio (and sometimes more). The others fall somewhere in-between.
The Rules To Apply To Establish A Multiple
The most important part of valuations is to consider this as two pieces to a puzzle. Part one is easy because it deals with the numbers and numbers don't lie (people do, and sellers especially do, but the numbers are the numbers!) You will use the historical financials to establish the Owner Benefit figure for each of the last three years or more.
Next, a weighted average must be applied to arrive at an "Average Owner Benefit" figure.
That's the first part.
The second part is to establish the actual multiple. To do so, you need to consider the fundamentals of the business, the years it has been around, the competition, the suppliers, the lease terms, the strength of the customers, the conditions of the assets, how easily the business will transition to a new owner, will customers continue to buy from you, and on and on the list goes. In other words, this part is really measuring the core of the business outside of the numbers.
Establishing the multiple is the most important aspect of the valuation exercise. It is also the part that traps most people who don't have a wealth of experience buying businesses. The good news is that with our guide, you also get access to a proprietary valuation spreadsheet that actually compiles the multiple and valuation for you. It is called the Diomo Business Assessment Method (DBA) and it was developed using over one thousand actual business investigations and valuations. It completes both pieces of the puzzle for you. All you do is enter the financials, answer some questions, and it does the rest of the work for you. (To read a review of The Diomo Business Assesment Method done by renowned valuation expert Ney Grant click here)
If You’re New At This, Here’s What To Do:
If you don’t know how to read an income statement, then learn. It’s crucial if you want to be successful in this process. Learning how to read and analyze statements is simple, and can be done quickly. Lesson # 11 in our guide will take you through this entire exercise and within an hour you will know how to read financial statements.
Determine the true Owner Benefits of the business. Be careful about the add-backs. Make certain that any benefits being added back are not necessary expenses needed to run the business.
You can only add back something that has been expensed.
Calculate an accurate multiple based upon the business’ strengths and weaknesses.
If the business is right for you, it is all right to pay a slight premium, but not too drastically overpay. Keep in mind as we teach in the course section on negotiating the deal, the value is often in the terms you get, not necessarily the price you pay.
Consider applying other valuation formulas simply as a test to your figure.
Professional Valuations: Do You Need One?
For most small businesses, hiring a professional to perform a valuation is not necessary. First of all it is expensive, and more often than not, it simply does not reflect reality. I read a valuation recently on a local company handling specialized telecom components in a very restricted marketplace doing $700,000 a year in sales and netting $100,000. The valuation started off: “The company is focused upon the B2B telephony segment which is a $42 billion industry in North America.”
I threw out the entire report after reading that one sentence. Why? How on earth can you possibly compare a $42-billion dollar industry and a $700,000 local distributor of telephone systems? Don’t waste time or money getting a professional valuation done. Let the seller do that if they so choose.
The Final Word: Accurately valuing a business is obviously a critical component to the business buying process. However, you always want to be certain that the business is right for you, not simply priced right. Knowing how to compile a valuation will not only assure you of paying the right price, but it will also demonstrate your knowledge when seeking financing for the deal. To eliminate the guesswork, make certain you use the automated valuation spreadsheets in the program How To Buy A Good Business At A Great Price©.
http://www.diomo.com/valuing-a-business.html
By Richard Parker: President of The Business Buyer Resource Center and author of How To Buy A Good Business At A Great Price ©
Accurately valuing a small business is often the most challenging part of the process for prospective business buyers. However, it doesn’t have to be an overwhelming or difficult undertaking. Above all, you should realize that valuation is an art, not a science. As a buyer, always keep in mind that the “Asking Price” is NOT the purchase price. Quite often it does not even remotely represent what the business is truly worth.
Naturally, a buyer’s valuation is usually quite different from what the seller believes their business is worth. Sellers are emotionally attached to their businesses. They usually factor their years of hard work into their calculation. Unfortunately, this has no business whatsoever being in the equation.
The challenge for you, the buyer, is to formulate a valuation that is accurate, and will prove to provide you with an acceptable return on your investment.
There are several ways to calculate the value of a business:
Asset Valuations: Calculates the value of all of the assets of a business and arrives at the appropriate price.
Liquidation Value: Determines the value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months).
Income Capitalization: Future income is calculated based upon historical data and a variety of assumptions.
Income Multiple: The net income (profit/owner's benefit/seller's cash flow) of a business is subject to a certain multiple to arrive at a selling price.
Rules Of Thumb: The selling price of other “like” businesses is used as a multiple of cash flow or a percentage of revenue.
Asset-based valuations do not work for small business purchases. Assets are used to generate revenue and nothing more. If a business is "asset rich" but doesn't make much money, how valuable is the business altogether? Conversely, if a business has limited assets, such as computers and office equipment, but makes a ton of money, isn't it worth more?
Income Capitalization is generally applicable to large businesses and most often uses a factor that is far too arbitrary.
"The key to making good decisions in life is education. There has always been a void in effective buyer educational tools until the course How To Buy A Good Business At A Great Price came along."
The “Rule of Thumb” method is too general. It's hard to find any two businesses that are exactly the same. Valuation must be done based upon what you, as the buyer, can reasonably expect to generate in your pocket, so long as the business’ future is representative of the past historical financial data.
The Multiple Method is clearly the way to go. You have probably heard of businesses selling at “x times earnings”. However, this can be quite subjective because earnings can actually mean different things in different businesses. When buying a small business, every buyer wants to know how much money he or she can expect to make from the business. Therefore, the most effective number to use as the basis of your calculation is what is known as the total “Owner Benefits”.
Note: You will come across different terms on various websites and in business for sale profiles for Owner's Benefit such as Seller's Discretionary Earnings, Adjusted Earnings, and others as well. Make certain that the seller provides you with the exact formula of how they arrived at this figure - this is critical.
The Owner Benefit amount is the total dollars that you can expect to have available from the business (based upon the past financials) to pay yourself a salary, service any debt, and marklet the business assuming that everything remains status quo after you take over. The beauty is that unlike other methods (i.e. Income Cap), it does not attempt to predict the future. Nobody can do that.
(Very Important: Owner's Benefit is not cash flow and cash flow is not profit. Cash Flow is probably the most misunderstood and misused accounting term. Cash Flow is simply the amount of cash a business had at the beginning of a period, how much it had at the end of a period and what happened in between to it.)
The theory behind the Owner Benefit number is to take the business’ profits plus the owner’s salary and benefits and then to add back the non-cash expenses. History has shown that this methodology, while not bulletproof, is the most effective way to establish the valuation basis of a small business. Then, a multiple, based upon a variety of factors, is applied to this number and a valuation is established.
The Owner Benefit formula to use is:
Pre-Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + Depreciation LESS Allowance for Capital Expenditures
Why Add Back Depreciation?
Depreciation is an expense that allows a business to deduct a certain amount of money each year from an asset so that its purchase value is reduced by its overall useful life. As an example: if the business buys a $25,000 truck and its useful life is estimated at 5 years, then each year the company can deduct $5000 off its income to lessen its tax burden. However, as you can see, it is not an actual cash transaction. No money is physically leaving the business or changing hands. Therefore, this amount is added back.
Why Add Back Interest?
Each business owner will have separate philosophies for borrowing for the business and how to best use borrowed funds, if necessary at all. Furthermore, in nearly all cases, the seller will pay off the business’ loans from their proceeds at selling; therefore, you will have use of these additional funds.
A Note About Add-Backs (Capital Expenditure Allowance)
After completing any add-backs, it is critical that you take into consideration the future capital requirements of the business as well as debt-service expenses. As such, in capital-intensive businesses where equipment needs replacing on a regular basis, you must deduct appropriate amounts from the Owner Benefit number in order to determine both the true value of the business as well as its ability to fund future expenditures. Under this formula, you will arrive at a "net" Owner Benefit number or true Free Cash Flow figure.
"I've just completed the purchase of an established business with a 30-year history, now retiring its second owner. Your guide was perfect in helping me select this business, especially in assessing its value. Thanks again for your personal attention to my purchase and pursuits."
Gil Takemori - San Jose, CA
What Multiple?
Typically, small businesses will sell in a one to three-times multiple of this figure. Now, this is a wide range, and some businesses will sell for more, so how do you determine what to apply? The best general rule to keep in mind und is that a one-time multiple is for those businesses where the seller is “the business”. In other words: "as out the door goes the seller, so too can go the customers". Consulting businesses, professional practices, and one-man businesses come to mind.
Businesses that have a strong track record, repeat clients, historical pattern of growth, more than 3 years in business, perhaps some proprietary item, a large customer base, or an exclusive territory, a growing industry, etc., will sell in the three-times ratio (and sometimes more). The others fall somewhere in-between.
The Rules To Apply To Establish A Multiple
The most important part of valuations is to consider this as two pieces to a puzzle. Part one is easy because it deals with the numbers and numbers don't lie (people do, and sellers especially do, but the numbers are the numbers!) You will use the historical financials to establish the Owner Benefit figure for each of the last three years or more.
Next, a weighted average must be applied to arrive at an "Average Owner Benefit" figure.
That's the first part.
The second part is to establish the actual multiple. To do so, you need to consider the fundamentals of the business, the years it has been around, the competition, the suppliers, the lease terms, the strength of the customers, the conditions of the assets, how easily the business will transition to a new owner, will customers continue to buy from you, and on and on the list goes. In other words, this part is really measuring the core of the business outside of the numbers.
Establishing the multiple is the most important aspect of the valuation exercise. It is also the part that traps most people who don't have a wealth of experience buying businesses. The good news is that with our guide, you also get access to a proprietary valuation spreadsheet that actually compiles the multiple and valuation for you. It is called the Diomo Business Assessment Method (DBA) and it was developed using over one thousand actual business investigations and valuations. It completes both pieces of the puzzle for you. All you do is enter the financials, answer some questions, and it does the rest of the work for you. (To read a review of The Diomo Business Assesment Method done by renowned valuation expert Ney Grant click here)
If You’re New At This, Here’s What To Do:
If you don’t know how to read an income statement, then learn. It’s crucial if you want to be successful in this process. Learning how to read and analyze statements is simple, and can be done quickly. Lesson # 11 in our guide will take you through this entire exercise and within an hour you will know how to read financial statements.
Determine the true Owner Benefits of the business. Be careful about the add-backs. Make certain that any benefits being added back are not necessary expenses needed to run the business.
You can only add back something that has been expensed.
Calculate an accurate multiple based upon the business’ strengths and weaknesses.
If the business is right for you, it is all right to pay a slight premium, but not too drastically overpay. Keep in mind as we teach in the course section on negotiating the deal, the value is often in the terms you get, not necessarily the price you pay.
Consider applying other valuation formulas simply as a test to your figure.
Professional Valuations: Do You Need One?
For most small businesses, hiring a professional to perform a valuation is not necessary. First of all it is expensive, and more often than not, it simply does not reflect reality. I read a valuation recently on a local company handling specialized telecom components in a very restricted marketplace doing $700,000 a year in sales and netting $100,000. The valuation started off: “The company is focused upon the B2B telephony segment which is a $42 billion industry in North America.”
I threw out the entire report after reading that one sentence. Why? How on earth can you possibly compare a $42-billion dollar industry and a $700,000 local distributor of telephone systems? Don’t waste time or money getting a professional valuation done. Let the seller do that if they so choose.
The Final Word: Accurately valuing a business is obviously a critical component to the business buying process. However, you always want to be certain that the business is right for you, not simply priced right. Knowing how to compile a valuation will not only assure you of paying the right price, but it will also demonstrate your knowledge when seeking financing for the deal. To eliminate the guesswork, make certain you use the automated valuation spreadsheets in the program How To Buy A Good Business At A Great Price©.
http://www.diomo.com/valuing-a-business.html
Buying a business
Buying a business
Buying a business can be a big step forward - but can also turn out to be a big disaster even for large corporations. The main pitfalls to acquiring a business are the same no matter what the size of the business that is being bought.
In this section we aim to cover the aspects of approaching a target business, completion of due diligence, negotiating the purchase and settlement once the deal is complete.
Approaching A Business
Due Diligence
Professional Advisors
Initial Offer, Risks and Submitting Offer
Heads of Agreement
Detailed Due Diligence
Historical information
Check on the major balance sheet items
Completing Due Diligence
Getting to the final terms
Following Completion
Approaching a business with view to Acquisition
The primary aim is to convince the vendor that he really wants to sell his business to you. With this in mind the purchaser needs to establish that he is a credible purchaser.
The buyer should initially register their interest in purchasing the business. The target will usually have instructed professional advisor's to sell the business therefore it is the advisor's that should be approached initially not the management.
The advisor's will require the purchaser to explain what their current business is (or the background of the purchaser if they do not currently have a business), why they are interested in that business, how they intend to purchase the business and if funds are currently available or how they will be obtained.
Integrity and future plans will often be extremely important to any vendor particularly if they have built their business up with the current workforce.
During discussions with the vendor and his advisors, the purchaser should attempt to evaluate whether the vendor needs to sell the business and if so what are the required timescales. Is money the prime motivation for selling and will the existing management and workforce remain involved in the business? These factors will have a bearing on the possible offer price.
Read more here:
http://www.alphalimited.co.uk/business-briefs/business-valuations-buying-a-business.htm
Buying a business can be a big step forward - but can also turn out to be a big disaster even for large corporations. The main pitfalls to acquiring a business are the same no matter what the size of the business that is being bought.
In this section we aim to cover the aspects of approaching a target business, completion of due diligence, negotiating the purchase and settlement once the deal is complete.
Approaching A Business
Due Diligence
Professional Advisors
Initial Offer, Risks and Submitting Offer
Heads of Agreement
Detailed Due Diligence
Historical information
Check on the major balance sheet items
Completing Due Diligence
Getting to the final terms
Following Completion
Approaching a business with view to Acquisition
The primary aim is to convince the vendor that he really wants to sell his business to you. With this in mind the purchaser needs to establish that he is a credible purchaser.
The buyer should initially register their interest in purchasing the business. The target will usually have instructed professional advisor's to sell the business therefore it is the advisor's that should be approached initially not the management.
The advisor's will require the purchaser to explain what their current business is (or the background of the purchaser if they do not currently have a business), why they are interested in that business, how they intend to purchase the business and if funds are currently available or how they will be obtained.
Integrity and future plans will often be extremely important to any vendor particularly if they have built their business up with the current workforce.
During discussions with the vendor and his advisors, the purchaser should attempt to evaluate whether the vendor needs to sell the business and if so what are the required timescales. Is money the prime motivation for selling and will the existing management and workforce remain involved in the business? These factors will have a bearing on the possible offer price.
Read more here:
http://www.alphalimited.co.uk/business-briefs/business-valuations-buying-a-business.htm
****How much is your Business worth and how can you increase its value?
Valuing a business
How much is your Business worth and how can you increase its value? These are the two questions which should be foremost in the business owners mind.
The worth of a business really depends upon how much money a purchaser can make from it compared to the risks involved in taking it on. Past profitability and asset values tend to be just the starting point and it is often the more intangible factors such as key business relationships, key personnel etc. which provide the most value.
Why Do We Value The Business?
What Affects Valuations?
Valuation Methods
Intangible Issues
Why Do We Value The Business?
There are four main reasons for obtaining a business valuation
1) To help buy or sell a business
By understanding the valuation process it can enable a business owner to
•Take steps to improve the real or perceived value of the business
•Decide the best time to buy or sell a business
•Negotiate better terms
•Complete a purchase more quickly
There is a better chance of a sale being completed if both the buyer and seller enter the process with realistic expectations
2) To assist in getting others to invest in the business particularly through equity
•A valuation of the business can help in agreeing a share price for new shares being issued
3) To create an internal market for shares
•A valuation can help buying or selling shares in a business at a fair price particularly when for example, a director is retiring and wishes to sell his shares
4) As a vehicle in helping to provide motivation for management
Regular valuations of the company is a good discipline which can:
•Provide a measurement yardstick for management performance when they see how they are increasing the net worth of the company
•Enables management to focus on important issues
•Help to expose areas of the business which need changing
All companies that are listed on a stock exchange have the quoted share price as a constant indicator of how well a company is doing. Unlisted companies need to do this in a slightly different way
What Affects Valuations?
There are three basic criteria which can affect the valuation of a business
1) The circumstances of a valuation
•An ongoing business can be valued in a number of ways (see later)
•A ‘forced sale’ will down value a company eg should an owner manager need to retire through ill health he may have to take the first offer that comes along. This is known as a fire sale.
•If the business is being wound up the break up value will be the net of the realisable value of the assets less liabilities outstanding
2) What is the value of the tangible assets of the business?
•A business which owns property or machinery for example will have substantial tangible assets
•Often businesses have no tangible assets beyond the value of its office equipment. This is particularly true of many service companies such as accountants and insurers.
3) What is the age of the business?
•A fairly new business may well have a negative net asset value but have an extremely high valuation in terms of future profitability especially where there are substantial long term contracts in place
Valuation Methods
Whatever the business is valued at with any techniques it must be remembered that this is a guide only. The true value of a business is what the purchaser is willing to pay for it . To arrive at this figure buyers will use various valuation methods and often a combination of methods. The main valuation methods are based upon:
1) Assets
This method would be appropriate if the business in question has significant tangible assets eg. a property company.
Basically the value of all the assets (both fixed and current) are added together and then the total of the business liabilities are subtracted from these to produce an asset valuation. The starting point for an asset valuation is to take the assets that are stated in the latest accounts (This is known as the ‘net book value’). This is refined to reflect the economic reality, for example, property prices may have increased substantially but their increase may not be reflected in the accounts, stock held may be old and have to be sold at a substantial discount or debts within the business may be ‘bad’ and therefore not likely to be paid.
2) Price/Earnings ratio
It would be common to use this method where a business is making sustainable profits which it has demonstrated over a number of years.
The price/earnings ratio (Known as the P/E ratio) is calculated as the value of a business divided by its profits after tax. Once the appropriate P/E ratio has been decided upon it is multiplied by the businesses most recent profits, its average profits over x number of years or on the calculated future profits(where contracts are in place and higher future profits can be justified).
P/E ratios are normally used to value businesses with an established history.
It should be noted that quoted companies will have a higher P/E ratio than unquoted. This is because their shares are much easier to buy and sell as there is a ready made market place and this therefore makes them much more attractive to potential investors.
P/E ratios are often adjusted by commercial circumstances, for example a higher forecast profit growth will result in a higher P/E ratio as will businesses which have constantly earned profits
3) Discounted future cash flows
This calculation is appropriate for businesses which are forecasting a steady or increasing cashflow in future years possibly as a result of an heavy investment programme. This method is the most technical way of valuing a business and relies heavily on assumptions regarding long term business conditions.
The main uses of this method are for cash generating businesses which are stable and mature, eg a publishing company with a substantial catalogue of best selling titles.
Where a business can inspire confidence in its long term prospects this method will underline the businesses solid credentials.
4) Costs of Entry
This method values the business with reference to the probable costs involved to start up a similar business from scratch. Costs included in the valuation would include purchasing similar assets on the open market, developing its products and processes, recruiting and training employees and building up the customer base. The business would also benefit from any cost savings that could be made by for example, using better technology or locating the business in a lower cost area with a cheaper labour pool. Once this is evaluated the business is then able to make a comparative assessment which can be based on a more realistic scenario of the cheaper alternatives.
Intangible Issues
As stated at the beginning, a key source of value to the business can often be things which cannot be measured.
•Key relationships
A key example cited was strong relationships with key customers or suppliers eg where an extremely good relationship has been developed with a key supplier by paying on time, supplying key forecast information to enable stocks in the supply chain to be kept to a minimum or providing technical expertise to develop jointly key components.
•Management Stability
This may be a critical decision in the potential value of a business - particularly in owner managed businesses - where key information about the business resides with the owner. Should he leave then the business would be worth far less eg the profitability of a design agency may plummet if the key creative person leaves or if key sales people leave and take their accounts with them.
•Restrictive Covenants
These terms in employees contracts could add value to a business by ensuring that key personnel are restricted from moving elsewhere or conversely could reduce the value to a potential buyer if they intend to bring their own management team in.
•Risks
The more potential risks that there are from the purchasers point of view, the lower the valuation will be.
Specific actions can be taken to build a more valuable business
•Setting up good systems eg good accurate management accounts. Good systems make nasty surprises unlikely.
•Ensure that sales are spread across a wide customer base. Where there are few large customers the potential for disaster from the loss of just one is increased substantially.
•Ensure that key customers and suppliers are tied in with contracts and mutual dependence.
•Exposure to other external factors such as interest or exchange rates should be minimised.
http://www.alphalimited.co.uk/business-briefs/business-valuations-valuing-a-business.htm
How much is your Business worth and how can you increase its value? These are the two questions which should be foremost in the business owners mind.
The worth of a business really depends upon how much money a purchaser can make from it compared to the risks involved in taking it on. Past profitability and asset values tend to be just the starting point and it is often the more intangible factors such as key business relationships, key personnel etc. which provide the most value.
Why Do We Value The Business?
What Affects Valuations?
Valuation Methods
Intangible Issues
Why Do We Value The Business?
There are four main reasons for obtaining a business valuation
1) To help buy or sell a business
By understanding the valuation process it can enable a business owner to
•Take steps to improve the real or perceived value of the business
•Decide the best time to buy or sell a business
•Negotiate better terms
•Complete a purchase more quickly
There is a better chance of a sale being completed if both the buyer and seller enter the process with realistic expectations
2) To assist in getting others to invest in the business particularly through equity
•A valuation of the business can help in agreeing a share price for new shares being issued
3) To create an internal market for shares
•A valuation can help buying or selling shares in a business at a fair price particularly when for example, a director is retiring and wishes to sell his shares
4) As a vehicle in helping to provide motivation for management
Regular valuations of the company is a good discipline which can:
•Provide a measurement yardstick for management performance when they see how they are increasing the net worth of the company
•Enables management to focus on important issues
•Help to expose areas of the business which need changing
All companies that are listed on a stock exchange have the quoted share price as a constant indicator of how well a company is doing. Unlisted companies need to do this in a slightly different way
What Affects Valuations?
There are three basic criteria which can affect the valuation of a business
1) The circumstances of a valuation
•An ongoing business can be valued in a number of ways (see later)
•A ‘forced sale’ will down value a company eg should an owner manager need to retire through ill health he may have to take the first offer that comes along. This is known as a fire sale.
•If the business is being wound up the break up value will be the net of the realisable value of the assets less liabilities outstanding
2) What is the value of the tangible assets of the business?
•A business which owns property or machinery for example will have substantial tangible assets
•Often businesses have no tangible assets beyond the value of its office equipment. This is particularly true of many service companies such as accountants and insurers.
3) What is the age of the business?
•A fairly new business may well have a negative net asset value but have an extremely high valuation in terms of future profitability especially where there are substantial long term contracts in place
Valuation Methods
Whatever the business is valued at with any techniques it must be remembered that this is a guide only. The true value of a business is what the purchaser is willing to pay for it . To arrive at this figure buyers will use various valuation methods and often a combination of methods. The main valuation methods are based upon:
1) Assets
This method would be appropriate if the business in question has significant tangible assets eg. a property company.
Basically the value of all the assets (both fixed and current) are added together and then the total of the business liabilities are subtracted from these to produce an asset valuation. The starting point for an asset valuation is to take the assets that are stated in the latest accounts (This is known as the ‘net book value’). This is refined to reflect the economic reality, for example, property prices may have increased substantially but their increase may not be reflected in the accounts, stock held may be old and have to be sold at a substantial discount or debts within the business may be ‘bad’ and therefore not likely to be paid.
2) Price/Earnings ratio
It would be common to use this method where a business is making sustainable profits which it has demonstrated over a number of years.
The price/earnings ratio (Known as the P/E ratio) is calculated as the value of a business divided by its profits after tax. Once the appropriate P/E ratio has been decided upon it is multiplied by the businesses most recent profits, its average profits over x number of years or on the calculated future profits(where contracts are in place and higher future profits can be justified).
P/E ratios are normally used to value businesses with an established history.
It should be noted that quoted companies will have a higher P/E ratio than unquoted. This is because their shares are much easier to buy and sell as there is a ready made market place and this therefore makes them much more attractive to potential investors.
P/E ratios are often adjusted by commercial circumstances, for example a higher forecast profit growth will result in a higher P/E ratio as will businesses which have constantly earned profits
3) Discounted future cash flows
This calculation is appropriate for businesses which are forecasting a steady or increasing cashflow in future years possibly as a result of an heavy investment programme. This method is the most technical way of valuing a business and relies heavily on assumptions regarding long term business conditions.
The main uses of this method are for cash generating businesses which are stable and mature, eg a publishing company with a substantial catalogue of best selling titles.
Where a business can inspire confidence in its long term prospects this method will underline the businesses solid credentials.
4) Costs of Entry
This method values the business with reference to the probable costs involved to start up a similar business from scratch. Costs included in the valuation would include purchasing similar assets on the open market, developing its products and processes, recruiting and training employees and building up the customer base. The business would also benefit from any cost savings that could be made by for example, using better technology or locating the business in a lower cost area with a cheaper labour pool. Once this is evaluated the business is then able to make a comparative assessment which can be based on a more realistic scenario of the cheaper alternatives.
Intangible Issues
As stated at the beginning, a key source of value to the business can often be things which cannot be measured.
•Key relationships
A key example cited was strong relationships with key customers or suppliers eg where an extremely good relationship has been developed with a key supplier by paying on time, supplying key forecast information to enable stocks in the supply chain to be kept to a minimum or providing technical expertise to develop jointly key components.
•Management Stability
This may be a critical decision in the potential value of a business - particularly in owner managed businesses - where key information about the business resides with the owner. Should he leave then the business would be worth far less eg the profitability of a design agency may plummet if the key creative person leaves or if key sales people leave and take their accounts with them.
•Restrictive Covenants
These terms in employees contracts could add value to a business by ensuring that key personnel are restricted from moving elsewhere or conversely could reduce the value to a potential buyer if they intend to bring their own management team in.
•Risks
The more potential risks that there are from the purchasers point of view, the lower the valuation will be.
Specific actions can be taken to build a more valuable business
•Setting up good systems eg good accurate management accounts. Good systems make nasty surprises unlikely.
•Ensure that sales are spread across a wide customer base. Where there are few large customers the potential for disaster from the loss of just one is increased substantially.
•Ensure that key customers and suppliers are tied in with contracts and mutual dependence.
•Exposure to other external factors such as interest or exchange rates should be minimised.
http://www.alphalimited.co.uk/business-briefs/business-valuations-valuing-a-business.htm
How and Where to Find a Business for Sale
How and Where to Find a Business for Sale
by BizHelp24
October 19, 2005
Chapter 2: Searching For a Business
The first thing to do before you search for a business is to make a criteria list for the ideal business you are looking for. Don't be too specific or your list will eliminate practically every business out there. Instead, just write down a few requirements from the list below:
•The type of business (service/product, industry, etc)
•The location of the business
•The size of the business (customers, suppliers, administration, number of employees etc)
•The performance (minimum level of profit/turnover you expect)
•The expected salary you hope to achieve
•Level of commitment (hours you are willing to put in)
•Required Assets (machinery, equipment, vehicles, etc)
•Premises (leased or owned, office or home, factory or lock-up)
The list can go on, so feel free to add anything that you feel essential.
2a) Franchises
If you would prefer to buy a business that has already proved successful, you may want to buy a franchise. You can find franchises the same way you would any other business that is for sale (see below). To read more about Franchising, visit the Franchising chapter of this article
2b) Finding That Business
This is the part that can take some time. You may already know which business you want but it is still a good idea to short list a few just in case the deal doesn't go through. Below are some of the main places that you can find businesses for sale:
(i) Newspapers/Magazines:
Advertisements are found in media mainly concerned with business or finance issues: for example; Exchange and Mart, Loot, local papers on specific days, quality weekend newspapers. Although the adverts may not give as much detail as you wanted, there will be contacts specified to make any queries. If you want to find a business locally, it is always best to look in your local and regional media.
(ii) Internet:
There are many web sites on the Internet that list businesses for sale. Your best approach would be to go through a search engine to find the relevant sites. We have managed to get hold of a few web sites to get you started.
•Biz Trader
•Forum Commercial
•Loot
•Turner & Co
•UK Business Base
(iii) Finance Services:
These will include Banks and accountants and they too will have details of businesses wanting to sell. The added advantage of consulting these services is that they will able to provide you with financial reports of the business (very useful).
(iv) Business Brokers and Estate Agents:
There are also a number of business brokers and business estate agents. These organizations have details of businesses for sale but you have to take into account that they may also be employed by the business to help sell it. Such agents can be found listed in telephone directories. Business brokers will be detailed further on the following page.
(v) Self-Advertising:
In addition to those said above, why not let the right business come to you? Advertise what you are looking for in a newspaper/magazine: this way you can be more specific about your requirements. Use word-of-mouth to widen your search - you never know what's out there until you ask!
http://www.bizhelp24.com/business-start-up/how-and-where-to-find-a-business-for-sale.html
by BizHelp24
October 19, 2005
Chapter 2: Searching For a Business
The first thing to do before you search for a business is to make a criteria list for the ideal business you are looking for. Don't be too specific or your list will eliminate practically every business out there. Instead, just write down a few requirements from the list below:
•The type of business (service/product, industry, etc)
•The location of the business
•The size of the business (customers, suppliers, administration, number of employees etc)
•The performance (minimum level of profit/turnover you expect)
•The expected salary you hope to achieve
•Level of commitment (hours you are willing to put in)
•Required Assets (machinery, equipment, vehicles, etc)
•Premises (leased or owned, office or home, factory or lock-up)
The list can go on, so feel free to add anything that you feel essential.
2a) Franchises
If you would prefer to buy a business that has already proved successful, you may want to buy a franchise. You can find franchises the same way you would any other business that is for sale (see below). To read more about Franchising, visit the Franchising chapter of this article
2b) Finding That Business
This is the part that can take some time. You may already know which business you want but it is still a good idea to short list a few just in case the deal doesn't go through. Below are some of the main places that you can find businesses for sale:
(i) Newspapers/Magazines:
Advertisements are found in media mainly concerned with business or finance issues: for example; Exchange and Mart, Loot, local papers on specific days, quality weekend newspapers. Although the adverts may not give as much detail as you wanted, there will be contacts specified to make any queries. If you want to find a business locally, it is always best to look in your local and regional media.
(ii) Internet:
There are many web sites on the Internet that list businesses for sale. Your best approach would be to go through a search engine to find the relevant sites. We have managed to get hold of a few web sites to get you started.
•Biz Trader
•Forum Commercial
•Loot
•Turner & Co
•UK Business Base
(iii) Finance Services:
These will include Banks and accountants and they too will have details of businesses wanting to sell. The added advantage of consulting these services is that they will able to provide you with financial reports of the business (very useful).
(iv) Business Brokers and Estate Agents:
There are also a number of business brokers and business estate agents. These organizations have details of businesses for sale but you have to take into account that they may also be employed by the business to help sell it. Such agents can be found listed in telephone directories. Business brokers will be detailed further on the following page.
(v) Self-Advertising:
In addition to those said above, why not let the right business come to you? Advertise what you are looking for in a newspaper/magazine: this way you can be more specific about your requirements. Use word-of-mouth to widen your search - you never know what's out there until you ask!
http://www.bizhelp24.com/business-start-up/how-and-where-to-find-a-business-for-sale.html
Valuation is what a business is worth
Business Valuation
by Tim Berry
Valuation is what a business is worth, as in “this company’s valuation is $10 million.” This would mean that a company is valued at $10 million, or worth $10 million. The term is used most often for discussions of sale or purchase of a company; it’s valuation is the price of a share times the number of shares outstanding, and the price of a share is the total valuation divided by the number of shares outstanding.
Some of the different valuation methods consider:
Rate of return
Timing and form of return
Amount of control desired
Acceptable level of risk
Perception of risk
Standard new venture valuation methods may include:
Asset-based valuation: the business is worth the sum of its assets. Not a popular valuation method for new businesses, because their future should be worth a lot more than their assets.
Book value: the book value of a company is the calculation of assets less liabilities.
Adjusted book value: this variation adjusts the assets – liabilities calculation for real value of assets, distinguished from the accounting value.
Liquidation value: what a business would yield in real money if its assets were liquidated.
Replacement value: what it would cost to replace the business if the replacement started from scratch.
Earnings Based Valuations: this is by far the most popular method for new businesses; they are valued based on future earnings.
Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation.
The term is used less in discussions of major publicly traded companies, but it is essentially the same as market cap or market capitalization.
Used as a verb, valuation is the process of determining what the business’ valuation. In this context, a valuation is like an audit, and a valuation expert is a CPA or analyst who does valuations. Some CPAs are certified as valuation experts, which means the IRS is more likely to accept their valuation as part of a transaction related to taxes.
References:
Valuation formulas
Valuation before investment.
Business start-up valuation.
http://articles.bplans.com/buying-a-business/business-valuation/212
by Tim Berry
Valuation is what a business is worth, as in “this company’s valuation is $10 million.” This would mean that a company is valued at $10 million, or worth $10 million. The term is used most often for discussions of sale or purchase of a company; it’s valuation is the price of a share times the number of shares outstanding, and the price of a share is the total valuation divided by the number of shares outstanding.
Some of the different valuation methods consider:
Rate of return
Timing and form of return
Amount of control desired
Acceptable level of risk
Perception of risk
Standard new venture valuation methods may include:
Asset-based valuation: the business is worth the sum of its assets. Not a popular valuation method for new businesses, because their future should be worth a lot more than their assets.
Book value: the book value of a company is the calculation of assets less liabilities.
Adjusted book value: this variation adjusts the assets – liabilities calculation for real value of assets, distinguished from the accounting value.
Liquidation value: what a business would yield in real money if its assets were liquidated.
Replacement value: what it would cost to replace the business if the replacement started from scratch.
Earnings Based Valuations: this is by far the most popular method for new businesses; they are valued based on future earnings.
Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation.
The term is used less in discussions of major publicly traded companies, but it is essentially the same as market cap or market capitalization.
Used as a verb, valuation is the process of determining what the business’ valuation. In this context, a valuation is like an audit, and a valuation expert is a CPA or analyst who does valuations. Some CPAs are certified as valuation experts, which means the IRS is more likely to accept their valuation as part of a transaction related to taxes.
References:
Valuation formulas
Valuation before investment.
Business start-up valuation.
http://articles.bplans.com/buying-a-business/business-valuation/212
What’s That Business Worth?
by Milton Zlotnick
- the balance sheet and
- the statement of income and expense.
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