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CS Professional · Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Sunrise Textiles Ltd plans to acquire a smaller rival. Its board asks a valuer to estimate the rival's worth. Before starting any analysis, what should the valuer do first in a standard valuation process?

The valuer should first define the purpose of the valuation, the standard and premise of value, and the valuation date. These decisions determine the approach, inputs and report. Selecting discount rates, applying multiples or writing the report are later steps that depend on this initial scoping.

  1. ADefine the purpose, the premise and the standard of value, and the valuation dateCorrect
  2. BSelect the discount rate for the cash flows
  3. CApply an industry multiple to the latest profit
  4. DPrepare the final valuation report for the board

Explanation

A valuation begins with clarity on why the valuation is needed, the standard of value (such as fair value), the premise (going concern or liquidation) and the valuation date. Discount rates, multiples and reports all follow only after this scoping. Choosing a discount rate first would be premature because the method depends on the purpose.

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