Market Values

6 Key excerpts on "Market Values"

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  eBook - ePub

  Private Capital Markets

  Valuation, Capitalization, and Transfer of Private Business Interests

  • Robert T. Slee(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Business Appraisal Practice (Fall, 2003).

  11 .

  Christopher Razaire, “How to Figure Odds in Forecasting Acquisition Results,” Mergers & Acquisitions (November/December 1995): 6–12.

  Passage contains an image CHAPTER 4 Market Value

  The world of market value describes the value of a business interest in the marketplace. Value is normally expressed as an equity enterprise value. The owner who says his business is worth $X is generally referring to the world of market value. By seeking a market value for his business, an owner is motivated to find the open market value, probably envisioning a transfer.

  “Market value” is defined as: The highest purchase price available in the marketplace for selected assets or stock of the company.

  This definition assumes the assets or stock of the company are valued on a debt-free basis, which means all interest-bearing debt must be deducted from the derived market equity values. Most market valuations are also done on a cash-free basis, meaning the seller keeps the excess operating cash and marketable securities in the company at the closing.

  An owner whose motive is to derive the highest value obtainable in the marketplace focuses the appraisal process on the world of market value. Adapting a concept from commercial real estate appraisal, the market value focuses on determining the highest and best value for a business. No other value world has this goal or requires the combination of methods unique to this value world.

  Rather than Internal Revenue Service (IRS) regulations, court precedents, or insurance company rules, financial intermediaries govern the market value. As with most private business valuation, market value requires a point-in-time expression of value. Determining value in this world requires a fair amount of market knowledge. In other words, the valuer needs to know what is really going on when two parties come together to make a deal.

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  Selling the Intangible Company

  How to Negotiate and Capture the Value of a Growth Firm

  • Thomas Metz(Author)
  • 2008(Publication Date)
  • Wiley

    (Publisher)

  Value exists in the context of a market. This begs an obvious question: What is a market? A market is a group of buyers and sellers who come together to buy or sell something. If the market is comprised of many buyers and many sellers then this is a liquid market. A good example is the stock market. There are many buyers and many sellers for most of the stocks traded on the exchanges or over-the-counter. The more buyers and sellers, the more liquid the market is. Liquidity is important because it enables one to buy or sell shares without driving the price up or down significantly.

  The market for shares of a small public company is not as liquid as for shares of a large public company. If an investor wants to buy or sell shares of a small public company it will cost him more because there are fewer buyers and sellers. The spread between the bid and asked prices is greater. In addition, the sale of a large number of shares will push the price down, sometimes significantly.

  For a small privately held company whose value is intangible there is no market of buyers. Since intangible companies are acquired by strategic buyers, there may be at most four or six companies in the world that are truly good buyers. This is not enough buyers to represent a real market.

  TYPES OF VALUE

  In order to better understand intangible value, let’s first discuss financial value, which is a more widely understood concept. Financial value is value based on expected future cash flows. In essence the buyer is purchasing a stream of cash flow in the future. The historical earnings can often be a good predictor of future earnings.

  For a public company, market capitalization is the simplest measure of a company’s financial value. Market capitalization is the current stock price multiplied by the number of outstanding shares. Market capitalization, or market cap, ignores debt however, and for companies with substantial debt this can change the picture dramatically. In most cases, enterprise value is a more accurate measure of value.

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  eBook - ePub

  Value Economics

  The Ethical Implications of Value for New Economic Thinking

  • M. R. Griffiths, J. R. Lucas(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  8.5 , the “market” will be the only way to “price” assets, as the “auction” markets demonstrate all the time. For example, a sale of contemporary art at Christie’s in July 2013 saw the painting of Michel Basquiat “Untitled”, painted in 1982 when the artist was 21, set a world auction record for the artist at £18.76 million.

  So, who could claim that this was the intrinsic value of the painting where the price was determined by an auction process where individual buyers with different risk appetites seek to outbid each other with the asset going to the highest “bidder”? The market will always remain an important means for pricing assets at any one moment in time, but it will not necessarily reflect intrinsic value. We need a system for comparing market prices and intrinsic value as part of the value reporting system so that the veracity of both values over time can be measured to highlight the disparities which can occur between the two. In determining the value of a Lloyds Bank share or the modern equivalent of a Baring’s subordinated note, we are not operating in the auction world of the art market, but the principle of market pricing remains the same. However, we need reporting systems which distinguish between “price” and “value” when an economic transaction takes place, even if the price exceeds or falls beneath the intrinsic value. New economic thinking needs to find effective ways of financial value reporting, which combines mark to market “pricing” and economic value.

  8.10 The Variability and Uncertainty of Future Economic Value

  Value is a dynamic and evolutionary concept, which means that balance sheet management cannot be a static process to be undertaken only at specific moments in time, but needs to be a day-to-day, if not a second-to-second, real-time process set up to manage change and uncertainty. We enter a world based on the Heisenberg and Gödel principles of uncertainty and incompleteness, which emphasize the stochastic, or random, nature of analyzing future economic value. This analytical process requires continuous attention on managing the unpredictability of risk-taking where the value at risk (VAR) will change according to the external (exogenous) conditions, such as new competitive structures, changes in technology, and the globalization of markets, and according to internal (endogenous) conditions arising from changes in human behaviour and consumer preferences at work within the markets in which “we have chosen to operate”. Such changes will have profound implications for business models, and the definition of the “value propositions” on which product and service offerings are based.

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  The Economics of Business Valuation

  Towards a Value Functional Approach

  • Patrick Anderson(Author)
  • 2013(Publication Date)
  • Stanford Economics and Finance

    (Publisher)

  1. Equity owners are entitled to receive the benefits of future earnings of the firm. 2. Equity owners receive the benefits of exerting control over the enterprise.

  We will also explore theories of value that consider one, or both, of these categories of benefits. We also consider carefully later in this text what we mean by the business having value; in general we will mean the title to the equity in the business has value.

  Economic Value Requires Institutions Necessary for Private Enterprise

  A valuable commodity must be something that can be defined, legally owned, and transferred for consideration (such as money payment) to another person. This may be summarized by saying a commodity must be the property of an owner.

  For property to have economic value, certain institutions in society are required. These include private property rights and enforcement of contract. Without them the business may not be able to rely on contracts to purchase supplies, sell its products, or pay its employees; the manager may not be able to control the enterprise; and the owner of the business may not be able to retain any profits he or she could make. We discuss these specifically in Chapter 4 , under the section titled “Institutional Requirements for a Firm.”

  Market Value in Economics

  Market value is the standard on which we base most of the analysis in this book and is a deeply established principle in economics. In general, the market value of any asset is the price for which it is exchanged among willing parties in a market, which consists of multiple potential buyers and sellers. The legal definition of fair market value is essentially identical: the value in a market with willing buyers and willing sellers, each with sufficient information9 , and neither under any compulsion.10

  This fair market value concept from economics is one of the most powerful and useful to emerge from the field. Indeed, it is now codified in countless laws, standards, court cases, individual contracts, and scholarly treatises in the United States and other countries.

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  eBook - ePub

  Litigation Services Handbook

  The Role of the Financial Expert

  • Roman L. Weil, Daniel G. Lentz, Elizabeth A. Evans(Authors)
  • 2017(Publication Date)
  • Wiley

    (Publisher)

  Fair value for financial reporting under GAAP is an accounting term. GAAP literature, such as that of the Financial Accounting Standards Board, provides the relevant guidance. Under GAAP, certain assets and liabilities appearing on financial statements and in their related disclosures will be stated at fair value rather than historical cost. The fair value of an asset often equals its FMV, but GAAP specifies a number of exceptions.

  Section 11.3(b) defines each of these valuation terms. Because case or statutory law often specifies the appropriate standard, the practitioner should obtain the standard of value from the attorney or client.

  Jurisdictions often have a definition for a valuation term that differs from the general meaning. For example, some family law courts require a calculation of the FMV of a spouse’s business, but they define the term differently than the business community does.11 In these instances, the definition can resemble that of investment value (i.e., the value of the business to the working spouse when no sale is contemplated).

  (b) Definitions

  This section defines common standards used in valuation practice. Sometimes an asset will have the same value under two different standards of value. The appendix to this chapter contains a comprehensive listing of the International Glossary of Business Valuation Terms, the source of some of these definitions.

  • Fair market value (FMV)
    The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.12

  FMV is the most commonly used business valuation standard and the legal standard for most valuation cases. Some government agencies, including the Internal Revenue Service (IRS), have adopted a similar definition in their regulations. IRS Revenue Ruling 59-60 codified this FMV definition in 1959, and also enumerated factors to consider when valuing closely held businesses.13 The IRS originally issued Revenue Ruling 59-60 for estate tax purposes, but business valuation practitioners widely use its concepts, including in valuation disputes. The IRS requires the use of FMV when the value of an asset is assessed for federal tax purposes. United States v. Cartwright, a U.S. Supreme Court case involving estate taxes, also defines FMV consistently with this definition and with U.S. Treasury regulations.14

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  Business Valuation

  Theory and Practice

  • Marco Fazzini(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This mechanism is easy to find in contemporary art auctions. Given an objective value, based on previous auctions, expert judgment, quality of the work, and so on, the results may differ significantly, reaching amounts that have little to do with the characteristics of the work or with the prices attained in previous auctions.

  Business valuations work in the same way. There is an objective component of value, based on valuations methods, and a subjective one, based on the valuer’s experience and ability to capture reality.

  This means that two equally knowledgeable persons, with similar sensitivity, will hardly get the same result, although they start from the same assumptions and quantitative inputs. To make a comparison, think of two chefs who are given the same ingredients to prepare a certain dish. The result may appear similar, but the different combination of timing, cooking processes, doses, creativity, experience, and dish presentation will lead to different outcomes.

  In this book, we will deal with the objective component, which is how we determine the value of a business based on generally accepted valuation methods. What does it mean to value a business? We can respond that valuation is the act of estimating or setting the potential value of a business by considering both internal and external variables.

  The internal variables look at the results a firm has achieved in the past; for example, the debt-to-equity ratio, EBITDA (earnings before interest, tax, depreciation, and amortization), revenues, and cash flow provide us with an understanding of what characterizes the business and constitute a basis for determining its value. The external variables look at the environment in which the company conducts its business and include, for example, market features, the company’s competitive positioning, distribution channels, or consumers’ tastes. In short, it is necessary to develop a comprehensive opinion that encompasses in one single model both the theoretical business value and the value that considers the environment where that business develops and performs its activity.

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