Valuation of a company and its assets

Introduction

Knowledge of goodwill is an important element of the company's management, one of the reasons for making strategic decisions about the future of a business.

 

 

Each company is unique and has a variety of resources; therefore, a company's valuation requires a custom-made approach and a detailed analysis of the valuation objective.

Valuation of a company, shares or stock

Company valuations are made, inter alia, for the sake of:

  • sales transactions,
  • donations,
  • merger, division, acquisition, or sale of a business,
  • change of legal form,
  • restructuring,
  • change of a company's ownership structure,
  • court proceedings,
  • providing information for the owner,
  • identification of the parity exchanges of shares or stock.

Our approach to each project is both unique and comprehensive, so it is important at the beginning of the cooperation to get to know the specifics of the business and to determine the valuation objective. Analysis of the market and of the current financial standing of, and of the property owned by the business helps us to select an appropriate valuation method and specify what detailed information is required.

 

After collecting and analysing all the data, we make a valuation of the company. The final stage of the process is to present the results to the Client and to provide a valuation report.

Three types of valuation methods are used to determine the fair value of a company: the property methods, the comparative methods and the income ones.

1.

Property methods are based on the valuation of individual assets.

Depending on the valuation objective, adequate value standards (accounting, market value, liquidation) are applied.

2.

Comparative methods refer the value of the company under valuation to comparable public companies or comparable past transactions via appropriately selected multipliers.

3.

Company valuation by means of an income method consists in reducing future cash flows generated by an enterprise to their value at the valuation date.

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Valuation of an organized part of an enterprise

 

One of the strategic decisions of a company is to separate from its structures one of its organized parts, which can be sold or contributed in kind to another enterprise. To carry out this process, it is necessary to evaluate this organized part of the enterprise.

The valuation of an organized part of an enterprise is like the valuation of an enterprise. It requires, first of all, an in-depth knowledge of the specifics of the valued activity and its components. The characteristics of a particular organized part of an enterprise help to select the valuation method to be used to determine this enterprise's value.

Three types of valuation methods are used to determine the fair value of a company: the property methods, the comparative methods and the income ones.

In accordance with Art. 4 (4) of the Corporate Income Tax Law, Art. 5a section 4 of the Personal Income Tax Law, and Art. 2 Section 27e of the VAT Law, an organized part of an enterprise is an organisationally and financially independent group of tangible and intangible assets, including liabilities, intended to carry out specific predetermined economic tasks. Unique for these components is their ability to independently perform specific tasks and activities.

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Trademark, brand and economic copyright valuation

Brands and trademarks are an important part of the identity strategy of products, services and the enterprise itself.

 

An image of a company created around the brand and the trademark influences the acquisition and strengthening of a competitive advantage. Therefore, the brand and the trademark are recognized as key intangible assets that contribute to the company's value.

Determining the fair value of the brand and the trademark is important from an enterprise's point of view in strategic, marketing and financial terms.

The fair value of the brand and the trademark can be used, inter alia, for the following purposes:

  • for the needs of the company and its owners,
  • for licensing the use of the brand and the trademark, e.g. within a franchise network,
  • for sales,
  • as a collateral for a credit or a loan,
  • for a contribution in kind to another entity.

 

An enterprise may have both registered or unregistered trademarks that may be subject to valuation. Therefore, at the beginning of our cooperation with the Client, we determine valuation scope and objective.

As to brand and trademark valuation, we rely on the financial data received from the company and on the information collected by specialised databases.

The valuation method of the brand and the trademark for the purpose of determining fair value which is the most commonly practiced, recognized and accepted by chartered auditors is the relief from royalty method. Its advantage lies in the linking of the brand and trademark values ​​with market conditions and the impact of the environment. This method is also commonly used in compensation and audit proceedings.

The process of brand and trademark valuation consists of the following stages:

  • identifying the purpose and object of valuation,
  • gathering data necessary for valuation,
  • analysis of the data received and of the factors influencing the brand and the trademark value,
  • drawing up the valuation model,
  • presentation of results and submission of the valuation report.

 

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Valuation of receivables portfolios

Determining the fair value of a receivables portfolio is crucial for entities that are considering an investment of purchasing a portfolio of receivables or for institutions and companies planning to sell overdue receivables.

 

 

Systematic valuations of the fair value of the receivables portfolio are moreover necessary if the security of debt financing is established on the portfolio and for the reporting of investment funds.

The valuation of the receivables portfolio consists of the following stages:

  • determining the object and purpose of the valuation,
  • gathering information for the valuation,
  • analysis of the data received,
  • preparation of the valuation,
  • presentation of the results and the submission of the valuation report.

 

 

 

In the case of valuations of corporate receivables or mortgage collateral, the method of discounted cash flows is most frequently used.

CMT Advisory has extensive experience in drawing up portfolios of receivables of various types. We have been valuing portfolios for transaction purposes and for reporting purposes to cooperative savings and loan banks, loan companies, cooperative banks, and debt collection companies. CMT Advisory's experience includes over a dozen portfolio valuation projects.

The valuation of portfolios of unsecured retail receivables is made using the PD / LGD methodology. This method has found a very broad application in practice; according to the New Capital Agreement, it is applied by banks in the advanced version of the internal rankings method. It is also used in estimating losses resulting from the insolvency of corporate bond issuers as well as for determining the value of retail loans and loans portfolios.

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Property and fixed assets valuation

REIA combines the know-how, expertise and competence of property valuers and the CMT Advisory team. Previous cooperation has resulted in the establishment of REIA, a company specializing in the valuation of commercial real estate. More information on our website: reia.pl

Valuation of know-how, technology and patents

Know-how and trade secrets are the intangible assets of almost every organisation. They may be documented in files, diagrams, drawings, or archives, yet such materials are usually only a small part of the entire asset in the form of know-how or trade secrets. These assets form an integral part of the organisation and are part of the intellectual capital of enterprises.

Know-how, technology and patents are part of the strategy of creating competitive advantage. Having such assets favourably impacts the ability of a business to generate revenue, whereas losing control over information being the know-how and trade secrets can pose a significant threat to the organisation.

Assets such as know-how, technology and patents are increasingly being traded, used in reorganisation and as collateral. Their reliable valuation is indispensable for the efficient execution of the above processes.

The methods of valuing the intellectual capital of enterprises include three groups: market methods, income methods and cost methods. The most popular method is that of license fee exemption and of income distribution.

 

 

Due to the increasing importance of intangible assets in creating a competitive advantage, the knowledge of the value of key assets has a significant impact on the adoption of a long-term business strategy.

 

The method of exemption from license fees assumes that companies and organisations may choose whether to favour ownership of the asset or whether to conclude a license agreement with the owner. Fair value is calculated as the present value of the hypothetical money paid to the owner of the asset from which the company is relieved in the event it owns the asset.

The method of income distribution establishes additional cash flows (income) generated by the use of the intellectual capital of enterprises and thanks to an appropriate distribution of these flows between the licensor and the licensee. Fair value is calculated as the present value of the hypothetical income of the licensor.  

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Valuation of contracts and relationships with clients

In the process of its business operations, each company builds relations with its clients. These may have a significant impact on the company’s future performance. In the process of valuation, fair value is assigned to the effect of these activities.

 

The valuation of contracts and relationships with clients includes, inter alia:

  • lists of clients,
  • order or production portfolio,
  • agreements with clients and related relationships,
  • non-contractual relationships with clients,
  • intangible assets arising from the contract
1.

The list of clients consists of information about clients such as their names and contact data. The clients list can be in the form of a database that contains other client-related information, such as the history of their orders and demographics. Clients lists are often leased or exchanged.

2.

The order or production portfolio is the effect of purchase or sale contracts. When an entity establishes relationships with its clients through contractual arrangements, such relationships result from contractual terms.

3.

An agreement with a client and related clients relationships may constitute two separate intangible assets. Both the duration of use and the way of consuming the economic benefits of these two assets may vary.

4.

The connection of an entity to its client occurs if the entity has client information and maintains regular contacts with the client, and the client can establish direct contact with the business. Client relations meet the contractual criterion if the entity has established a relationship with clients regardless of whether the agreement exists as of the date of the acquisition. Client relationships can also arise through other agreements, such as regular contacts maintained by sales or service representatives.

5.

Client relationships can also be a source of value creation in other areas of business operations. As a result of the cooperation, specific intangible assets can be created, such as know-how and product brands, which provide a lasting competitive advantage.

 

All of the above can have a significant impact on the value creation and can be subject to valuation. Valuation of these assets is used both for transactional purposes and for events requiring disclosure in the enterprise's balance sheet.

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Software and domain names evaluation

Computer programs and program formats that are subject to legal protection such as those resulting from patent or copyright law meet the legal and contractual criterion of intangible assets. Computer software as well as mobile device applications are significant assets of an enterprise and directly or indirectly provide the company with sales revenue.

Registered Internet domain names create a link between a name and a designated computer on the Internet during the registration period. Under current conditions, registered domain names have a function similar to trademarks, that is to say, they are part of a strategy of building the visibility of products, services and the enterprise itself, and contribute to the acquisition and consolidation of a competitive advantage.

Market transactions involving intangible assets in the form of software or its components, as well as Internet domains have become common practice. These transactions require the preparation of a fair value valuation in order to determine the terms and conditions of the transactions that enable its effective implementation.