In simple terms, the purpose of performing a company valuation is to gain an independent view of the estimated amount for which an asset should exchange on the effective valuation date between a willing buyer and seller in an arm’s length transaction.
Merchantec Capital has performed independent company and equity valuations for private, listed and governmental organisations and has a dedicated team of valuation experts who are able to analyse even the most complex business combinations in an efficient and professional manner. Merchantec Capital has a significant amount of expertise and experience which allows us to use a combination of judgement and market research to review and evaluate assumptions regarding a company’s future, the market in which it operates, the competitor landscape and a host of other key assumptions required to arrive at an independent, transparent and holistic valuation. Sensitivity analysis is also done on the key assumptions in order to stress test the valuation result.
Our primary valuation methodology is based on a Discounted Cash Flow methodology with a relative Price Earnings multiple being incorporated as a reasonability tool.
Some examples of the purposes for which Merchantec Capital provide independent valuations services are set out below:
Indicative and independent valuations
To enable management to make sound decisions around potential transactions, whether as the acquirer or the target, legal disputes (including dissenting shareholder opinions), estate planning, shareholder exits, BEE transactions and corporate restructuring, we perform a valuation of the business as a going concern as well as the underlying equity.
Solvency, liquidity and working capital review
We review the assumptions, calculations and outcomes of the solvency and liquidity requirements of entities as detailed in the South African Companies Act, 2008.
INTANGIBLE ASSET/GOODWILL TESTING VALUATIONS
As most companies are worth more than the sum of their parts, in order to gain a complete understanding of an entities underlying value, a determination of intangible assets is required.
In addition to this and in terms of accounting requirements, IFRS 36: Impairment of Assets requires that there is impairment testing on goodwill on an annual basis. Furthermore, it involves a rigorous understanding of the operational aspects which should reliably reflect the consumption of the economic benefits incorporated in purchased goodwill.
Merchantec Capital has the expertise and experience to perform the valuation of complex intangible assets/goodwill which can be relied upon from both an internal management perspective as well as for external purposes, such as purchase/sale agreements or audit requirements.
PURCHASE PRICE ALLOCATION VALUATIONS (“PPAV”)
The PPAV process is one whereby the fair value of all significant business intangible assets and liabilities of an acquired enterprise must be determined in accordance with IFRS 3: Business Combinations.
IFRS 3 requires that once an acquisition becomes effective all intangible assets are separately identified apart from goodwill and carried at fair value on the acquirer’s statement of financial position.
These valuations require tailored expertise due to the judgement required in assigning individual values to a variety of intangible assets. Furthermore, they cannot be performed by a firm’s auditor due to a conflict of independence as the auditors would be required to audit these fair values. Thus by using a qualified external valuation expert, the transparency, reliability and independence of the fair value of the intangibles will be heightened.
INDEPENDENT EXPERT REPORT (“IER”)
In compliance with the South African Companies Act, 2008, companies are required to obtain an IER in respect of Affected Transactions. An IER is prepared by an independent expert, approved by the Takeover Regulations Panel, to assist the company’s independent board to form and express an opinion in order to make a recommendation to shareholders with regards to the fairness and reasonability of an Affected Transaction. Instances where an IER is required include:
Affected Transactions and Offers:
- S112 – Disposal of all or greater part of assets or undertakings by companies;
- S113 – Amalgamation or a merger of companies;
- S114 – Scheme of arrangements (this also includes the repurchase by a company of 5% or more of its issued share capital);
- S117 – Acquisition of the remaining voting securities not already held by a Person or company;
- S123 – Mandatory offers; and
- S125 – Comparable and partial offers.
This IER is applicable to the following entities:
- Public companies;
- State owned enterprises (unless exempt by the State); and
- A private company, should 10% of the entities shares have been transferred within a 24 month period.
A fairness opinion is a report prepared by a JSE approved independent expert expressing an opinion on whether a transaction is fair/unfair to shareholders. This report is usually included in a circular issued to shareholders to assist shareholders in deciding whether or not to approve a transaction.
The following transactions are examples of where a fairness opinion would be required:
Related party transactions;
- Where shares, options or convertible securities are issued to a related party at a discount;
- Where shares are purchased from a related party at a premium; and
- Delisting from the JSE.
“The Merchantec Capital valuations team has been approved as an independent professional expert by the JSE for valuations in all industries including property, mining and insurance”
There are various situations which give rise to the need for the valuation of options or other financial instruments. This can include valuations of businesses where these instruments form part of the ownership structure, or specific transactions that include a share based consideration as defined in terms of the accounting standard IFRS 2.
The valuation is performed using complex models, with the two common models being a Binomial model and the Black Scholes model. These models takes into account a variety of inputs and assumptions, such as:
- The duration of the option;
- The share price and volatility of returns;
- The likelihood that options will not be exercised; and
- The risk-free rate.
Share based payments can be a considerable expense and thus the use of an expert will reduce the risk of non-compliance with IFRS 2 as well as ensuring that all factors have been adequately considered to ensure that an accurate determination has been completed and disclosed.
INTELLECTUAL PROPERTY VALUATIONS
Unlike many of the traditional assets found on a company’s balance sheet, intangible assets, such as patents, trademarks and customer relationships are far more difficult to place a value on. Thus, understanding the underlying value of your intellectual property (“IP”) and having valuation information that can be relied upon is an essential business tool.
Companies require IP valuations for a number of reasons, such as for strategic purposes in terms of a potential purchase/sale, for tax compliance or to secure future funding.
A further key outcome of performing an IP valuation is to benchmark internal performance by assessing IP values on a year to year basis. In this way, executives are accountable for value created or destroyed and measures can be put in place to ensure that the desired strategic company goals are achieved.
Merchantec Capital has the expertise and experience to perform complex IP valuations and employs a variety of methodologies, tailored to the circumstances, such as:
- The Cost Approach, which aggregates all the costs involved in the development of IP;
- The Market Approach, which uses comparable IP sales as a benchmarking tool; and
- The Income Approach, which assess the cash generating potential of the IP.