The Valuer software uses an analytical approach, and is designed to simplify the calculation of the value of a business using projections of its future cash generation ability and provide the analysis with the minimum of user data input. The computer presentation and print facility will enable the components of the analysis to be provided for business planning.

How the business valuation software works

There are two factors, which form the valuation of an enterprise. They are the future cash flow generated by the business and the risk associated with generating it, and the analysis quantifying the external environment on the three levels under which the business operates. All businesses are subject to external variables, which can have a positive or negative effect on the success of the enterprise. Generally outside the control of management they will form part of the overall risk of the investment. These risk variables cover the climate of the economy, the age and structure of the industry and the competitive market position. This forms the first part of the analysis, which will determine the attractiveness of the investment. We have called the scoring mechanism the gamma rating.

Complete business appraisal

As an analogy, the higher you travel vertically in a helicopter, the wider will be your view of the ground. In appraisal of an organisation, this entails viewing the business from an external perspective by analysing the local market, in the context of the industry and the general state of the macro economy.

For the valuation of the business, the process of analysis has to include the more general economic situation, as it will generate a climate that may or may not be conducive to investment success. Little can be gained from an untimely investment, unless you are willing to accept short-term losses.

We have therefore designed a questionnaire to address the relevant variables of each section, weighted the possible answers according to their importance and assigned each answer a score which, when collated with the answers from questions on the industry and market sections, make up the gamma rating.

The gamma

Each question in the first stage of the valuation process is assigned a value, within a pre-determined range, its position dependant on its level of influence on the attractiveness of investment conditions. Each answer is weighted according to its level of importance and its effect on the other variables in the section. For instance, the level of inflation will have an effect on interest rates, as the central bank will attempt to simulate or dampen demand by reducing/increasing rates.

To avoid a linear plane when plotting different attractive scores, which would leave out extremes, we utilise the normal distribution curve and measure from mean. This avoids penalising or rewarding those organisations that have a marked difference in non-financial performance scores relative to their nearest competitor. For instance, two businesses may operate in the same industry, and the same market place. However, by prudent choice or luck, a business may find itself better positioned, through the adoption of better tactics than its competitor.

At the end of the first stage of the analysis which has covered macro economics, the industry conditions and market's competitive profile. The investment is awarded an overall score which is then added to the firm's weighted average cost of capital figure to find the discount factor which has now taken into consideration the specific risk and expected return.

Stage two

The second stage utilises the discounted free cash flow method to forecast the cash generation capability of the business. Adding together the weighted average cost of capital (WACC) and the gamma score, produced at the end of stage one will determine the market risk factor. Gamma calculates the individual firm's attractiveness without the need to rely on a market proxy to determine how the value of the investment will move relative to its market.

The process to determine the free cash flows to discount, are taken from the previous accounting results of the business and extrapolated for a maximum of five years, as it is unrealistic to determine growth or decline beyond this period. The ongoing value cash flow is assessed and added to the annual figures to arrive at the value of operations.

This continuing value is the accumulated book value figure calculated by deducting balance sheet liabilities from assets.