Going-Concern Business Appraisal – Business Valuation
What is a going concern appraisal?
A Going-Concern Business Appraisal provides us with the cost of the business, including fixed assets, current assets, liabilities, brand, personnel, technology, etc. That is to say, the entire environment in technical and economic matter of the same.
In this type of appraisal, it consists of carrying out a valuation study of the company as a going concern, taking into account the valuation methodology through discounted cash flows attributed to the business to be studied, discounted by an appropriate discount rate, this The study also involves carrying out a commercial appraisal of the fixed assets property of the company, which is the minimum value that the company would have as a going concern, import expenses, freight, labor, installation, engineering are taken into account, also considering the physical state, maintenance, obsolescence, productivity , market situation, etc. Thus providing the total cost of fixed assets.
Going concern refers to the economic unit that is presumed to be in continuous existence and that will continue in operation for the foreseeable future. The commercial unit or economic unit is in operation and generates economic benefits. This definition is based on the basic postulate of the NIF A-2 (Financial Reporting Standards).
The concept of going concern includes the valuation of the company as a business in continuous operation at present value (discounted flows), this means that the financial value of an entity is catalyzed during an infinite period of life. In order to make an appropriate identification of its value, an analysis of the assets as a whole must be given, and also those of greatest value for the company, make a revaluation that allows to properly identify the updated value to VR, this depends on the very purpose of the company and that both want to sophisticate the method.
Likewise, the study can have different classifications of values, such as the liquidation value, or as "operating independently", "fair value", "strategic value or investment", These are used depending on the situation of the company, the need of the majority shareholders, or of a sector company that wants to acquire a competitor due to strategic decisions or the destruction of competition.
In short, you have to have the ability to evaluate and understand the past of the company, its current environment and the future, subject to the global, objective and/or sector economy.
What is the scope of a going concern assessment?
It consists of carrying out a valuation study of the company as a going concern, taking into account the valuation methodology through discounted cash flows attributed to the business to be studied, discounted by an appropriate discount rate, this study also involves carrying out the commercial valuation of the fixed assets ownership of the business, which is the minimum value that the business would have as a going concern.
The ultimate goal is to generate an analysis and assess your own level of risk, identifying the different elements relevant to your success. or the failure of an investment or a capital creation itself, a multi-scenario valuation and a sensitivity analysis must be done to bring the service itself to a more precise method, this usually depends on the very purpose of the valuation.
Method for performing a going concern valuation
He evaluation method to use for your project will depend on the following questions:
What are we going to value?, What business/product is it?, What is the objective of the business valuation?, What approach do we require for the valuation?, What sector does the company belong to?, Is there public information or pay to find information on the sector?, among other questions that may arise during the Due Diligence itself
In order to project the value of a company, its historical behavior, the behavior of companies, sector, trends of the leading companies in the industry, estimates by analysts for the leading companies must be evaluated.
For these studies, it is possible to make use of the standardization of the financial statements, to project in a more sensitive way to the needs of the objective of the appraisal itself, within this the adjustment to liabilities, intercompany, or taking sector behaviors can enter. among other practices, this has to be attached to the appraisal itself, so that every recipient of said report is clear on the practices developed during the development of the study.
Most common and used methods for going concern / financial options:
The most common and most used method to carry out the appraisal of a going concern is the study of "Discounted Cash Flows (FCFF and FCFE)", in the case of cambia startups, or first impact companies incorporated into technological, innovation or immediate impact processes, in these cases a valuation can be made by multiples. If of financial options, usually the most used method is Black & Scholes.
The objectives of determining the value of a company can be divided into:
- Buy and sell
- Share Restructuring
- Series Change in Actions
- Valuation of Listed Companies
- Probate successions
- Identification and prioritization of Value Drivers
- Strategic business continuity decisions
Other cases of need for appraisal of ongoing business:
There are atypical cases to value a business in progress and in these cases it is used the cost method, we list application examples:
- Losses or few profits as an economic entity (commercial bankruptcy)
- capital intensive industries
- real estate
- some financial institutions
The market method It is also used when you want to acquire based on similar operations in a common sector. This often has an intrinsic value because it is connected with a strategic value, so you have to do an analysis of the trajectory of the same operation.
IN MEMORY OFJose Alfredo Gutierrez Mendez
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