FUNDAMENTAL PRINCIPLES OF VALUATION • Allocating scarce resources to their most productive o Analysts must balance and evaluate

use serves the interest of different stakeholders. different assumptions.

• Assets, individually or collectively, have value. Value
pertains to the worth of an object in another Understanding Value and Valuation o Analysts must assess the validity of
person’s point of view. empirical evidence.
• Success in investments involves understanding:
• Any kind of asset can be valued, though the degree o Rational choices must align with the
o Prevailing value
of effort needed may vary on a case-to-case basis. valuation objective.
o Key drivers that influence value
• Methods to value real estate may be different from
how to value an entire business. • Increase in value may imply that shareholder
VALUATION CONCEPTS AND METHODOLOGIES
capital is maximized, fulfilling the promise to capital
Capital and Shareholder Value
providers. Fundamental Equation of Value
• Businesses treat capital as a scarce resource that
• Valuation: Estimation of an asset’s value based on: • A company creates value if and only if the return on
they should compete to obtain and efficiently
capital invested exceeds the cost of acquiring
manage. o Variables perceived to be related to future
capital.
investment returns
• Capital providers require users to ensure they will
• From the perspective of corporate shareholders,
maximize shareholder returns to justify providing o Comparisons with similar assets
value relates to:
capital.
o Estimates of immediate liquidation
o Difference between cash inflows generated
• If capital users do not maximize shareholder proceeds
by an investment and the cost associated
returns, capital providers will seek more attractive
• Valuation includes: with it
investment opportunities.
o Use of forecasts to estimate entity’s assets o Capital invested, capturing both time value
• The most fundamental principle for all investments
or equity value of money and risk
and businesses is to maximize shareholder value.
o Consideration of how pursuing a specific • Three major factors affecting business value:
• Maximizing value for businesses results in:
project affects entity value
o Current operations: Operating performance
o Higher economic output
• Professional Judgment in Valuation: of the firm in recent years
o Better productivity gains
o Valuation involves projections about future o Future prospects: Long-term, strategic
o Employment growth events. direction of the company

o Higher salaries
 o Embedded risk: Business risks involved in o If market price perfectly reflected intrinsic o Both parties have reasonable knowledge of
operations value, rational investors would not spend relevant facts.
resources to gather information (Grossman-
Challenges in Valuation o Commonly used in tax assessments.
Stiglitz Paradox).
• Rapid technological advancements and
o Securities analysts seek mispriced stocks to
globalization make valuation more dynamic.
make buy/sell recommendations. USES OF VALUATION IN BUSINESS
• Determining value and relevant drivers is more
2. Going Concern Value Portfolio Management
complex than in the past.
o Assumes the entity will continue its • Valuation relevance depends on investor
• Challenges include:
business activities in the foreseeable future. objectives:
o Increased difficulty in assessing current
o Assets and obligations will be realized and o Passive investors: Disinterested in
operations
paid in the normal course of business. valuation.
o Constant changes in macroeconomic
3. Liquidation Value o Active investors: Use valuation to
indicators
participate in the stock market.
o Net amount realized if the business is
o Uncertainty due to new risks and
terminated and assets sold piecemeal. • Types of analysts:
competition
o Used for companies experiencing severe o Fundamental analysts: Measure intrinsic
Concepts of Value
financial distress. value by assessing financial strength,
1. Intrinsic Value profitability, and risk.
o Usually lower than going concern value due
o Value of an asset based on a hypothetical to absence of operational synergies and ▪ Long-term investment strategies:
complete understanding of its investment human intervention.
▪ Reliable measurement of
characteristics.
4. Fair Market Value value and underlying factors.
o Considered the "true" or "real" value that
o Price at which property changes hands ▪ Stable relationships over an
will become the market value when other
between a willing buyer and a willing seller. extended period.
investors reach the same conclusion.
o Transaction occurs at arm's length in an ▪ Market deviations correct
o Since complete information is impractical,
open and unrestricted market. over time.
investors estimate intrinsic value.
o Neither party is under compulsion to buy or ▪ Value investors: Purchase
sell. undervalued stocks.
 ▪ Growth investors: Invest in high- o Market expectations: Assess alignment o Synergy: Additional value created by
growth potential businesses. between firm’s future performance and merging firms through cost reductions,
stock price. increased revenues, and operational
o Security and investment analysts:
efficiencies.
o Professional analysts provide valuation
▪ Provide buy/sell recommendations.
insights for investors. o Control: Impact of management changes on
▪ Compare market price to firm value due to restructuring.
o Analysts in brokerage firms publish research
expectations and fundamentals.
reports for clients. Control
o Activist investors:
o Buy-side analysts evaluate investment • Change in people managing the organization
▪ Seek poorly managed firms with options for portfolio managers. brought about by the acquisition.
growth potential.
Analysis of Business Transactions / Deals • Any impact on firm value resulting from the change
▪ Push for management changes to in management and restructuring of the target
• Valuation is crucial in business transactions.
unlock value. company should be included in the valuation
• Used to estimate target firm value and negotiation exercise.
o Chartists:
price.
• This is usually an important matter for hostile
▪ Rely on stock price trends and
• Types of business deals: takeovers.
trading volume.
o Acquisition: Buying firm determines target Corporate Finance
▪ Believe investor psychology
firm’s fair value before bidding.
influences stock prices. • Involves managing the firm’s capital structure,
o Merger: Two companies combine assets to including sources and strategies that the business
o Information traders:
form a new entity. should pursue to maximize firm value.
▪ React to newly revealed market
o Divestiture: Sale of a business segment. • Deals with prioritizing and distributing financial
information.
resources to maximize firm value while balancing
o Spin-off: Separation of a business segment
▪ Correlate value with new profitability and risk appetite.
into a new legal entity.
information impact.
• Planning and implementation of resources are key
o Leveraged buyout: Acquisition financed by
• Valuation Techniques in Portfolio Management aspects.
significant debt, using acquired business as
o Stock selection: Identify fairly priced, collateral. Private Businesses and Valuation
overpriced, or underpriced assets.
• Key factors in deal valuation:
• Private businesses that need additional money to o Industry peculiarities
expand use valuation when approaching private
VALUATION CONCEPTS AND METHODOLOGIES o Company strategy
equity investors and venture capital.
Legal and Tax Purposes o Company’s historical performance
• The ownership stake that capital providers will ask
from the business in exchange for the money put in • Valuation is important for legal and tax purposes. • Enables analysts to develop appropriate
will be based on the estimated value of the small assumptions capturing business realities.
• Example: If a new partner joins a partnership or an
private company.
old partner retires, the whole partnership should 2. Industry and Competitive Analysis
• Companies that wish to obtain additional funds by be valued to identify buy-in or sell-out amounts.
• Frameworks like Porter’s Five Forces help organize
offering their shares to the public also need
• Businesses that are dissolved or liquidated require industry and competitive analysis.
valuation to estimate the price they are going to
valuation to determine the division of assets.
fetch in the stock market. • Key areas of focus:
• Firms are valued for estate tax purposes when the
• Decision-making regarding project investments, o Industry characteristics
owner passes away.
borrowing amounts, and dividend declarations to o Competitive challenges
shareholders is influenced by company valuation. Other Purposes
o Industry structure trends
• Corporate finance ensures that financial outcomes • Issuance of a fairness opinion for valuations
and corporate strategy lead to firm value provided by third-party (e.g., investment bank). • Industry structure refers to the technical and
maximization. economic characteristics affecting industry
• Basis for financial institutions' assessment of
dynamics.
• Current business conditions push businesses to potential lending activities.
focus on value enhancement by looking at the Porter’s Five Forces
• Share-based payment/compensation valuation.
business holistically and focusing on key levers 1. Rivalry Among Market Players
affecting value.
o Less intense if there are fewer competitors
• Companies focused on maximizing shareholder Valuation Process
(higher industry concentration).
value use valuation to assess the impact of various 1. Understanding the Business
strategies on company value. o Higher concentration leads to higher
• Includes industry and competitive analysis, financial profitability potential.
• Valuation methodologies enable communication information analysis, and corporate disclosures.
about significant corporate issues between o Considerations:
management, shareholders, consultants, and • Analysts and investors must consider:
▪ Industry rivalry intensity
investment analysts. o Economic conditions
 ▪ Degree of differentiation o Strong supplier power lowers industry • Higher firm value when competitive advantage is
profits. sustained.
▪ Switching costs
o Considerations: Corporate Strategies for Competitive Advantage (Michael
▪ Information access
Porter)
▪ Supplier concentration
▪ Government restraints
• Cost Leadership: Lowest cost among competitors
▪ Alternative supplier availability
2. New Entrants while maintaining quality.
▪ Relationship-specific investments
o Barriers to entry affect competition and • Differentiation: Unique product/service features
profitability. ▪ Government regulations customers are willing to pay a premium for.

o Considerations: 5. Buyer Power • Focus: Targeting a specific segment using either

cost leadership or differentiation.
▪ High entry costs deter new entrants o Customers’ ability to negotiate favorable
terms. 3. Business Model Analysis
▪ Economies of scale
o Higher fragmentation of buyers lowers • Understanding how a company generates revenue.
▪ Brand reputation
buyer power, improving industry
• Includes:
▪ Government restraints profitability.
o Products/services offered
3. Substitutes and Complements o Considerations:
o Target customers
o Relationships between interrelated products ▪ Buyer concentration
and services. o Delivery methods
▪ Availability of substitute products
o Considerations: • Helps analysts determine key performance metrics
▪ Customer switching costs
for valuation.
▪ Availability of substitute products
▪ Government restraints
4. Historical Financial Performance Analysis
▪ Prices of substitutes
Competitive Position
• Analysts review financial statements to gauge
▪ Government regulations
• Measures how a company’s products/services company performance.
4. Supplier Power stand out.
• No strict rule on analysis duration; typically covers
o Suppliers' ability to negotiate favorable • Market share is a key indicator. 2-10 years.
terms.
• Methods:
 o Horizontal analysis (year-over-year Possible Balance Sheet Considerations
Line Item Possible Observation
comparison) Interpretation • Off-balance sheet financing (e.g., leasing,
o Vertical analysis (proportional relationships Accelerated securitization) may obscure true financial position.
within financial statements) revenue • Increase in bank overdraft reported as operating
Revenues Early revenue recognition (e.g.,
o Ratio analysis (e.g., profitability ratios, recognition cash flow may artificially inflate cash flow.
and bill-and-hold sales, pre-
liquidity ratios) may mask
Gains installation recognition) Red Flags from AICPA Guidance
declining
• Benchmarking against competitors or industry
performance. • Poor quality of accounting disclosures (e.g., lack of
standards provides insights.
segment reporting, unclear accounting policies).
Nonrecurring
• Publicly available financial information sources:
Nonoperating gains included as gains may hide • Existence of related-party transactions.
o Regulatory filings (e.g., stock exchange operating income poor
• Disputes or frequent changes in auditors.
reports, audited financial statements) performance.
• Large non-audit services provided by the audit firm.
o Press releases May
• High management/director turnover.
o Industry reports (e.g., Nielsen, Euromonitor) temporarily
Expenses Understatement/overstatement
improve/hurt • Excessive pressure to meet earnings targets.
o Ethical sourcing: Only publicly available and of reserves (e.g., bad debts,
income but
information should be used. Losses restructuring) • History of securities law violations or late filings.
impact future
5. Quality of Earnings Analysis periods. Financial Performance

• Focuses on the reliability of reported earnings. May inflate Understanding how the business operates and analyzing
current historical statements is essential. Forecasting financial
• Adjustments may be needed for nonrecurring Deferral of expenses via
income but performance follows as the next step.
transactions (e.g., litigation settlements, tax reliefs, capitalization
hurt future
nonoperating asset sales). Financial performance can be viewed through two lenses:
income.
• Compares net income against operating cash flow • Macro Perspective – Viewing the economic
to ensure reported earnings are realizable in cash. May indicate environment and industry where the firm operates.
Aggressive estimates (e.g.,
attempts to
Observations in Financial Statements useful life, asset impairment, • Micro Perspective – Focusing on the firm’s financial
manipulate
pension discount rates) and operating characteristics.
earnings.
Forecasting summarizes the future-looking view of the o Starts at lower levels of the firm. • Consideration of industry financial ratios is
business landscape and results from the strategy, which is essential.
o Captures what will happen based on inputs
categorized into two approaches:
from segments/units. • Historical financial trends provide a basis for
Forecasting Approaches prospective trends; deviations must be justified.
o Example: Store expansions and increase in
1. Top-down Forecasting Approach product availability are collated, and the • Sales and profit numbers should align with current
resulting revenues are calculated. trends unless significant new information suggests
o Begins with an assessment of industry and
otherwise.
competitive landscape. o Inputs from various segments are
consolidated until company-level revenues • Forecast results should align with industry
o Forecasting starts from international or
are determined. dynamics and the firm’s competitive position.
national macroeconomic projections.
Forecasting Process • General economic and market trends serve as
o Analysts identify relevant projections and
reliable benchmarks, but firm-specific factors
apply them to the firm. • Industry, competitive, and business strategy
should also guide forecasting.
analysis insights should be incorporated.
o Common variables used include:
• Forecasts are typically conducted annually, as most
• Sales, operating income, and cash flows must be
▪ GDP forecast publicly available financial statements follow an
critically forecasted.
annual format.
▪ Consumption forecasts
• Assumptions must be based on informed judgment
• Seasonality must be factored into earnings
▪ Inflation projections and deep understanding of the business.
forecasts (e.g., peak sales during summer and
▪ Foreign exchange currency rates • Comprehensive forecasting should include holiday seasons, lean sales during rainy months).
earnings, cash flow, and balance sheet forecasts.
▪ Industry sales
• Ensures consistency between financial statements
▪ Market share Valuation Concepts and Methodologies
and realistic assumptions.
o A key outcome is the forecasted sales Selecting the Right Valuation Model
• Prospective financial analysis should be done per
volume of the company.
line item, as each can be influenced by different • The appropriate valuation model depends on:
o Revenue forecast is built from forecasted business drivers.
o Context of valuation
sales volume combined with company-set
• Forecasting starts with determining sales growth
sales prices. o Inherent characteristics of the company
and revenue projections.
2. Bottom-up Forecasting Approach
• Once a model is chosen, forecasts are inputted and ▪ Adjustments for firm-specific issues
converted into the valuation model. that affect firm value.
Six Principles in Valuation
• This step is not merely about encoding the forecast ▪ Some factors may not affect value in
1. Value of a Business is Defined at a Specific Point in
but ensuring the valuation output makes sense. core business operations but still
Time
influence valuation.
• Analysts must evaluate whether the derived value
o Business value changes daily due to
aligns with their knowledge of the business. ▪ Includes:
transactions and market conditions.
• Two key considerations in valuation modeling: ▪ Control Premium –
o Valuation is based on a specific date and
Additional value assigned if
1. Sensitivity Analysis should be contextualized accordingly.
acquiring stock provides
▪ A common methodology in valuation controlling power. 2. Value Varies Based on the Business’s Ability to
exercises. Generate Future Cash Flows
▪ Lack of Marketability
▪ Multiple analyses assess how Discount – Applies when o Most valuation techniques emphasize
changes in input variables affect the stock cannot be easily sold future cash flows.
outcome (firm value). (e.g., non-publicly traded
o In some cases, asset liquidation provides a
stock).
▪ Common variables used: better value assessment.
▪ Illiquidity Discount – Applied
▪ Sales growth 3. Future Cash Flows Are More Relevant Than
when share liquidity is low or
Accounting Profits
▪ Gross margin rates if a large stock portion is sold
relative to trading volume. o Investors prioritize cash flow over
▪ Discount rates
accounting profits.
▪ Lack of marketability and
▪ Other variables may include:
illiquidity discounts lower o Cash flow includes operational cash, capital
▪ Market share share value. investments, working capital, and taxes.

▪ Advertising expense Applying Valuation Conclusions and Providing o Historical data is a starting point for future
Recommendations cash flow projections.
▪ Discounts
• After calculating the value based on assumptions, 4. Market Dictates the Appropriate Rate of Return
▪ Differentiated features
analysts and investors use the results to make for Investors
2. Situational Adjustments or Scenario recommendations or investment decisions.
Modeling
 o Market forces fluctuate, influencing • Sellers should maximize value by attracting • Businesses manage uncertainty by adapting
expected investment returns. potential buyers. strategies and responding to market changes.

o Industry and economic conditions impact

required return rates.
Risks in Valuation
o Understanding market-dictated return rates
• Uncertainty is always present in valuation
is crucial for valuation accuracy.
exercises.
5. Firm Value is Impacted by Underlying Net Tangible
• Uncertainty represents the range of possible firm
Assets
values.
o Strong tangible assets enhance business
• Analysts may not account for all risks affecting asset
stability and going concern value.
prices.
o More assets provide security in financing
• Future estimates in valuation models inherently
and liquidation scenarios.
carry risk due to unforeseen events.
o Sufficient tangible assets support projected
• Cost of capital or discount rates incorporate
operational growth.
uncertainty.
6. Value is Influenced by Transferability of Future
• Analysts must use sound judgment when making
Cash Flows
valuation assumptions.
o Businesses that operate independently of
• Uncertainty is heightened by:
ownership have higher transferability value.
o Market fluctuations
o If business success relies on the owner,
value may be limited to net tangible assets. o Industry unpredictability

o New competitors and innovations

Liquidity and Valuation Impact • A business’s historical stability does not guarantee
future value.
• Liquidity is dictated by demand and supply theory.
• Changes in economic conditions, consumer
• If many buyers compete for few acquisition targets,
preferences, and business models contribute to
firm value increases.
valuation risk.
ASSET-BASED VALUATION • Brown field investments are considered Going • Enables investors to quantify the impact of the risk
Concern Business Opportunities (GCBOs), which and/or the cost of managing these risks.
Definition of Asset
have long-term or infinite operational periods.
• Theoretically, asset value is dependent on the
• Assets have been defined by the industry as
Advantages of Going Concern Business Opportunities economic benefits (i.e., cash flows) it provides.
transactions that would yield future economic
(GCBOs)
benefits as a result of past transactions. Asset-Based Valuation Methodology
• Reference for performance from historical data or
• The value of investment opportunities depends on • A company's value is driven by its asset base.
existing businesses with similar nature.
the value that the asset will generate from now
• Asset-based valuation allows analysts to validate
until the future. • Risk indicators can be identified and quantified.
firm value through asset valuation.
• The value should include all cash flows that will be Risk Management and Asset-Based Valuation
• Some approaches rely on the ability of the asset to
generated until the disposal of the asset.
• Committee of Sponsoring Organization of the generate revenue, but they only focus on current
Valuation in Practice Treadway Commission (COSO) suggests that risk and historical values, potentially disregarding future
management principles must be observed in value.
• Valuation is a sensitive and confidential activity in
businesses and asset valuation.
portfolio management. • Familiarity with Generally Accepted Accounting
• Benefits of Enterprise-wide Risk Management: Principles (GAAP) is essential for analysts.
• It should be kept confidential to allow the company
to negotiate a better position for acquiring an 1. Increase opportunities. • Information required for asset-based valuation:
opportunity.
2. Facilitate management and identification of o Total value of the assets.
• Since the value of assets depends on their ability to risk factors affecting the business.
o Financing structure (total liabilities and total
generate economic benefits, it is more challenging
3. Identify or create cost-efficient equity).
to determine the value of a green field investment
opportunities.
compared to a brown field investment. o Classes of equity and other sources of
4. Manage performance variability. funding.
o Green field investments: Investments that
started from scratch. 5. Improve management and distribution of Popular Asset-Based Valuation Methods
resources across the enterprise.
o Brown field investments: Opportunities 1. Book Value Method
that are either partially or fully operational. 6. Make the business more resilient to abrupt
2. Replacement Value Method
changes.
3. Reproduction Value Method
Importance of Risk Identification in Asset Valuation
 4. Liquidation Value Method • Example: • Definition (National Association of Valuators and
Analysts): Cost of similar assets that have the
Book Value Method o Grape and Vines Corp. (Year 20xx):
nearest equivalent value as of the valuation date.
• Definition: The value recorded in the accounting ▪ Current Assets: Php500 Million
• Factors affecting Replacement Value:
records of a company.
▪ Non-current Assets: Php1 Billion
1. Age of the asset - Determines upkeep costs
• Based on audited financial statements, particularly
▪ Current Liabilities: Php200 Million and availability.
the balance sheet (Statement of Financial
Position). ▪ Non-current Liabilities: Php700 2. Size of the asset - Important for real
Million property and production capacity.
• IAS No. 1 requires the statement of financial
position to summarize total assets, liabilities, and ▪ Outstanding Shares: 7 Million 3. Competitive advantage - Unique assets may
equity. require value approximation by combining
o Computation:
separate assets.
• Assets Classification:
▪ Net Book Value of Assets =
• Formula:
o Current Assets: Realized within the entity’s (Php1,500,000,000 -
normal operating cycle, within 12 months, Php900,000,000) / 1,000,000 shares Replacement Value per Share = (Net Book Value +
or primarily held for trading. Replacement Adjustment) / Outstanding Shares
▪ NBV of Assets = Php600 per share
o Non-Current Assets: Realized in more than • Example (Grape and Vines Corp.):
• Advantages:
12 months.
o 50% of Non-current Assets have a
o Transparent view of firm value.
• Liabilities Classification: replacement value of 150% of book value.
o Verifiable based on financial statements.
o Current Liabilities: Settled within 12 months o 50% of Non-current Assets have a
or within the entity’s normal operating • Limitations: replacement value of 75% of book value.
cycle. o Reflects historical value only, might not o Adjusted Non-current Assets =
o Non-Current Liabilities: Due to be settled represent current or real business value. Php1,125,000,000
beyond 12 months.
Replacement Value Method o Adjusted Total Assets = Php1,625,000,000
• Formula:
• Addresses the limitation of the book value o Computation:
Net Book Value of Assets = (Total Assets - Total Liabilities) method by adjusting asset values to their
/ Number of Outstanding Shares replacement cost.
 ▪ Replacement Value = o 80% of total non-current assets can be Liquidation-based valuation methodologies assess a
(Php1,625,000,000 - reproduced at 90% of book value. business's worth based on the proceeds that would be
Php900,000,000) / 1,000,000 shares generated if its assets were sold under different
o 20% consists of goodwill, which remains
circumstances. These approaches are particularly relevant
▪ Replacement Value = Php725 per unchanged.
in financial distress, mergers and acquisitions, or when
share
o Adjusted Non-current Assets = evaluating a company's exit strategy. The primary types of
Reproduction Value Method Php920,000,000 liquidation values include Forced Liquidation Value (FLV)
and Orderly Liquidation Value (OLV), each offering distinct
• Used when no external information is available on o Adjusted Total Assets = Php1,420,000,000
perspectives on asset disposal scenarios.
replacement cost.
o Computation:
• Definition: The estimated cost of reproducing,
▪ Reproduction Value =
creating, developing, or manufacturing a similar Types of Liquidation Values
(Php1,420,000,000 -
asset.
Php900,000,000) / 1,000,000 shares 1. Forced Liquidation Value (FLV)
• Commonly applied to:
▪ Reproduction Value = Php520 per FLV represents the amount a company can expect to
o Internally developed equipment. share receive if its assets are sold under urgent or distressed
conditions. Key characteristics include:
o Specialized business assets. Liquidation Value Method
• Quick sale: Assets are typically sold in a short time
o Start-ups or businesses reliant on intangible • Definition: Assumes asset value is based on the
frame, often at auction.
assets. liquidation value of the business.
• Discounted pricing: Buyers leverage the urgency,
• Challenges: • Most conservative approach as it considers the
leading to lower realizable values.
amount investors would receive at the end of the
o Limited market comparators.
company’s life. • Common application: Bankruptcy proceedings,
o Difficult to validate reproduction cost asset seizures, and emergency sales.
• Limitation: Does not fully incorporate the future
estimates.
potential value of the business. Example: A manufacturing company facing bankruptcy is
• Formula: forced to auction off machinery within a month. Due to
• Further discussion on this method is included in
urgency, the sale price is significantly lower than the
Reproduction Value per Share = (Net Book Value + the next chapter.
market value.
Reproduction Adjustment) / Outstanding Shares
Liquidation-Based Valuation Methodologies
• Example (Grape and Vines Corp.):
Introduction
2. Orderly Liquidation Value (OLV) Expected Lower due to Higher due to market decisions about asset management, risk assessment, and
Value urgency exposure financial planning.
OLV assumes that assets are sold in a structured manner
over a reasonable period, allowing for better price Opportunistic Broader market
realization. Key attributes include: Buyers
investors participants
• Extended sale timeframe: Assets can be marketed
Common Use Bankruptcy, asset Business restructuring,
properly to attract potential buyers.
Cases seizure planned asset disposal
• Higher realizable value than FLV: Buyers have time
to assess the asset’s worth, reducing urgency
discounts. Application in Financial Analysis

• Common application: Strategic restructuring, Liquidation-based valuation is crucial in:

planned business closures, and asset sales to
• Assessing bankruptcy risk: Helps creditors estimate
improve liquidity.
potential recovery values.
Example: A retail chain decides to close a few
• Mergers and acquisitions (M&A): Buyers evaluate
underperforming locations over six months. The gradual
liquidation value when assessing distressed assets.
liquidation of store inventory and equipment ensures fair
market value is obtained. • Financial reporting: Used in impairment testing
when a business is at risk of dissolution.

• Loan underwriting: Lenders consider liquidation

Comparison of FLV and OLV
values when determining collateral security.
Forced Liquidation Orderly Liquidation
Criteria
Value (FLV) Value (OLV)
Conclusion
Immediate to Medium-term
Timeframe Liquidation-based valuation methodologies provide
short-term (structured timeline)
essential insights into asset disposability under varying
Sale conditions. While FLV highlights worst-case recovery
Distressed, urgent Planned, strategic
Condition scenarios, OLV presents a more controlled asset sale
perspective. Businesses, investors, and financial
institutions rely on these valuations to make informed