Leg Pain Before Ovulation

Business Valuation through heritage approach (simplified case)

There are many methods of business valuation. One of the most commonly used approach is heritage which assumes that the company is worth what it has.

This method is preferred in societies where the share of assets (tangible, intangible and financial) is important
- trade activity and distribution
- industrial
-
holding companies - financial activities (banks, institutions credit)
- property companies

We will examine this approach using a simplified example to understand the major joints.

a corporate presentation YZ

YZ is a family holding company which owns three assets:
- A goodwill consists of a certificate not operated in an industrial product
- A building in Paris
- A financial contribution of 10% in an industrial society V listed.

Balance at 31/12/2006
In M €



Net Assets Intangible asset 50
Land and Construction 100 10

Immobilization Financial receivables Inventories
1 2
Cash (cash) 7 Total

: 170

Liabilities

Capital: 30
Reserves : 40
medium term debts: 100

Total: 170

2 Calculation of the net assets

A first step in our evaluation is the calculation of the ANC (Net Asset):

ANC = total assets - liabilities - Other current liabilities = capital + reserves + profit carried forward

In our example:

ANC = 170 to 100 = 30 + 40 = 70

This is a static approach based on a historical record, at time T and therefore has no real connection with market values.

3 Calculation of assets Net Value (NAV)

We will correct the historical values for the figures to their real value

3.1 Assessment of intangibles

Several evaluation methods can be used. In our example, intangible assets consist only of a patent unexploited.

We will use the method of valuation of patents by research costs. The patent is weighed against the cumulative costs of research were necessary to its development. Indeed, insofar as the patent is not yet exploited, we can analyze the patent in relation to profits made.

In our example, research costs are estimated at € 55 million. Is a correction of 5 M € (55-50) over the book value at 31/12/06.

3.2 Fixed tangible

In our example, we estimate the notary of the building in Paris which is 150 M €.

Either a correction of +50 M € (150-100).

3.3 Correcting financial assets

Generally, the equity side are evaluated by reference to their stock price. Others may be by reference to quoted companies in the same sector.

In our example, the price at the valuation date is 110 euros per share. Our Holding owns 100 000, or 110 million euros.

The correction is therefore € 10 million (110-100).

3.4 Calculation of the ANR ANR

ANC = + unrealized capital gains - unrealized losses

This definition does not take into account the deferred taxes on capital gains and losses on disposal. It assumes that the company does not dispose of assets generating capital gains. We are in a logic of continuity of operations.

ANR = 70 + 5 +50 +10 = 135 M €.

The valuation of the company according YZ heritage approach is € 135 million.

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British Accounting: Summary of main differences with the French accounting



1 Accounting

In France, the interaction between accounting and taxation is high, whereas in Britain it is not the case: the accounting and taxation are independent. Taxable income is determined extra - an accounting through reinstatements and tax deductions.

This principle of independence added to concern of having a true and fair accounts of the company (a "true and fair view" principle we also know in IFRS) imply significant differences between the French accounting UK and we examine in Chapter 2.

2 The records

2.1 The management report.

Establishes the leaders of society, it aims to provide an overview of the company at the end of the year.

2.2 The income statement (profit and loss account).

Less detailed than in France, the ranking is done by function (in France by nature) and will need to use the schedules to find the nature of income and expenses. Key positions



Turnover ( Turnover, Concept of income or sales similar to the French concept)

- Cost of sales ( Cost of production sold, has cats 1st materials, cost of labor, costs of production including depreciation of assets used in R & D ...)

= Gross profit or loss (Gross )

- Distribution costs (costs of distribution, Marketing, personnel costs related to the function distribution, advertising, transport, ...).

- Administrative expenses (Administrative Overhead)

- Other Operating Income (other revenues)

= Operating Profit (EBIT)

+ Income from shares in group (income from affiliates, dividends, investments short term)
- Interest payable and similar expense (Interest payable and similar charges)

= Profit or loss is ordinary activities Before Tax (Profit before tax)

- Extraordinary Items (Extraordinary items, p roducts and charges rare but significant. Action taken by management).

= Profit or loss for the Year (Profit for the year)

2.3 The Balance Sheet (Balance Sheet)

In France, the Review contains the active column and next another column on the liabilities of the company with a rating of less liquid (equity capital) at the liquid (bank overdrafts, cash).

In Britain, the presentation is to list (see simplified list below):

Fixed Assets (Fixed Assets)
+ Current Asset (assets)
- Creditors: Amounts falling due Within One Year (Current liabilities )
- Creditors: Amounts falling due after More Than One Year (Medium Term Debt) =
Capital and Reserves (Net assets / equity capital)

The deviations from the French accounting:

- The principle of basis as in French accounting is the valuation of balance sheet at historical cost. Nevertheless, Great Britain, revaluations, even partial and completed at different dates can change the historical values.

- The concept of goodwill does not exist. The marks are recorded as an asset. Intangible assets are amortized.

- Regarding fixed assets, there is a total disconnect with the tax depreciation. Assets acquired under finance lease should be capitalized (in France it's off-balance in the accounts) with cons in part to passive, recording the debt-financed.

- The assets and liabilities due within one year are presented separately.

- The legal reserves are not compulsory in Britain.

3 Conclusion

Differences between British and French accounts are especially marked in the company accounts and may disappear in the consolidated accounts based on the options chosen by the French company (in particular the transition to IFRS).

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indicators of alerts concern for businesses.

Before they can trigger insolvency proceedings (liquidation, receivership, Backup), financial indicators can prevent creditors (including banks) find themselves managing a highly sensitive situation ...

ratios and indicators mentioned in this article are obviously not to be analyzed individually and without any context (well-capitalized holding company can not be assessed in the same way that a company operating well capitalized, for example). Similarly the numerical standards do not take into account their absolute value!

1 Indicators of financial structure

-A debt is very important -> Debt Net financial (short and medium term, taking into account the availability) / FP> 1.
-One Small Cap Ratio PS / Total assets. Are there blocked the CSF to strengthen the FP?

Remember: The company have a high debt proper and related to capitalization?

2 Activity and profitability

- A large variation in activity (change in turnover> 25% or <15%). Une entreprise dont le développement est trop fort aura des besoins d’exploitation élevés. Le recours à de l’endettement financier risque par le biais des charges financières de grever la rentabilité courante, la CAF de l’entreprise et in fine provoquer une impasse de trésorerie.
Conversely a decrease in activity important and recurring may impact the profitability. Indeed, some number of operating expenses are slightly compressible (rents and personnel expenses for example).

- An absence or a negative operating profitability (EBITDA / Sales <0) et récurrente.

- A heavy weight of expenses: Interest expense / EBITAD> 40%

Remember: The company releases t it recursively profitability and positive enough?

3 The Functional Assessment

- A negative working capital
- A significant change in working capital (> 5 days)
- Delays in relation to major customers as possible suppliers. The company Does it happen to get paid quickly enough avoid deadlock cash?

Remember: The financial balances are respected? A sufficient level of stable and controlled operating needs (level of customer and supplier delays, weight stocks) can generate a net cash position.

4 A communication breakdown company

- Delay in publication of accounts and consolidated
- No disclosure or delay in the communication of intermediate situations.