Value Assessment

Value assessment refers to the process of measuring the real-time or intrinsic worth of a company, individual, product, stocks, property, software, healthcare facilities, etc., for better decision-making, pricing, and planning. It considers the quantitative aspect of understanding the relevance of something in the current scenario.

The value of assets, companies, and products changes over time. Therefore, it becomes critical to gauge their present worth to ensure that strategies are headed in the right direction. Authorized fund managers (AFMs) are required to annually quantify the value of every fund under their management to offer optimum value to investors while preserving their capital.

The value assessment in finance emphasizes gauging the actual worth of a company or asset in the current period. It is crucial to identify the relevance of assets, products, services, businesses, investments, software, etc., at present. Some of the prominent methods for value analysis include the capital asset pricing model (CAPM), price-to-earnings ratio (PE ratio), fundamental analysis, net asset value (NAV), and dividend discount model (DDM). 

The Financial Conduct Authority (FCA) has stated the following five pillars of value:

• Performance; 
• Quality of service; 
• Costs charged by the AFM; 
• Comparable market rates; 
• Comparable services; 
• Economies of scale and 
• Classes of units.

Business can take different forms, including operational, financial, and intangible valuations. In operational valuation, the company determines the level of efficiency in providing customer satisfaction and optimal utilization of assets and resources. Further, financial valuation speaks about the actual worth of a company's assets. Intangible value also includes the business's goodwill, brand value, and unique selling proposition.

The business value assessment is a systematic process that involves the following steps:

• Collect Historical Financial Data: The foremost step is to gather financial data that shows its performance and profitability in the long run from reliable sources to ensure accuracy and completeness.
• Adjustments to Financial Statements: The next step is to eliminate unusual items or non-recurring expenses from the financial statements to present the firm's true earning potential.
• Evaluate Company Assets: Then comes the computation of the accurate value of both tangible assets (property and equipment) and intangible assets (intellectual property and brand value). It is often better to hire certified professionals for this purpose.
• Gauge Fair Market Value: The last step is to identify the fair market value by performing the test using any of the following methods:
  • Asset-Based Approach: It is simply the difference between a firm's assets and liabilities.
  • Market-Based Approach: Another method is to compare a business with its competitors and its past sales performance to evaluate its potential value.
  • Income-Based Approach: This approach requires using a discounted cash flow (DCF) analysis method to determine a project's estimated profits and future cash flow.

The fair value assessment is a critical process in organizations. Moreover, it is a standard process during alimony, real estate dealing, or related litigation. Its significance can be understood through the following examples:

Example #1

Suppose the finance manager performs a value assessment of a company established in 2021 using the discounted cash flow method. During the analysis, it was found that the present value of the company's future cash flows is $5 million. Investors use this information to determine the business's profit potential and growth prospects. Moreover, management uses it to plan their future course of action.

Example #2

Franklin Templeton has announced fee reductions on several of its funds, including the W share classes of the FTF ClearBridge US Equity Income and Franklin US Opportunities funds, according to its latest Assessment of Value (AoV) report. Additionally, the fee caps will be lowered for all share classes of the FTF Templeton Global Total Return Bond fund. The FTF Martin Currie UK Managers' Focus fund will also see a reduction in management fees alongside changes to its investment policy. Furthermore, the firm plans to merge the FTF Martin Currie UK Opportunities fund with the FTF Martin Currie UK Rising Dividends fund.

While the board confirmed that 17 funds delivered value to investors, five funds—including FTF Franklin US Opportunities and FTF Martin Currie Asia Unconstrained—require closer monitoring and specific adjustments, the FTF Martin Currie Japan Equity fund will change its investment approach and a fee reduction due to significant underperformance, which resulted in a 25.2% loss over five years compared to sector and benchmark gains of over 35%.

In a dynamic environment, the value of businesses, investments, products, assets, properties, and almost everything tends to surge or fall over the period. Thus, value assessment plays a critical role for the following reasons:

• Facilitates decision-making: Analyzing the current value of assets, funds, businesses, products, and services helps individuals and companies make sensible decisions based on these insights.
• Aids in future planning: It helps plan and devise future strategies based on this change in value to ensure business sustainability.
• Helps in pricing: The changing value of products, services, and raw materials is essential for companies' pricing decisions.
• Better project management: Project value assessments can improve quality and schedules and enhance the involvement of stakeholders.
• Value creation: The fund managers often assess the value of the funds or assets under management to derive maximum value for their investors and protect the invested capital.
• Enhanced financial reporting: The companies can state the actual value of their assets in their books of accounts for better financial reporting.
• Ensure relevance: This further helps the company stay relevant in the current period when the value of business, products, assets, or services has either increased or decreased.
• Fostering change: The process helps in accepting and bringing about change to align the strategies with the perceived value.
• Business excellence and commitment: Companies that improve over time while staying relevant at all times are considered committed to their goals by their stakeholders, customers, employees, and other associates.
• Optimal resource utilization: When businesses understand the actual value of their products, assets, and other business aspects, they can effectively use their resources for optimal outcomes.
• Cost reduction: A proper value analysis can prevent companies from underutilizing resources, investing in inappropriate avenues, and wasting time and effort, thus curtailing the overall cost.

While every firm or organization functions upon value-based assumptions, it can be challenging to gauge the actual value in business and other fields. Some of the underlying issues are as follows:

• Subjective: It is difficult to determine the intrinsic value of something since the value is a matter of subjectivity, I.e., it differs from individual to individual and company to company. The same thing that is valuable for one person may seem worthless for another.
• Dynamic: Moreover, it keeps on changing over time; therefore, it becomes even more crucial and challenging to ascertain the real-time status of assets, products, or firms.
• Driven by uncontrollable factors: The value of properties, assets, funds, companies, and products most often fluctuates due to certain uncontrollable factors, such as the external environment.
• Poor data quality: The value assessment is usually based upon the insights and data collected by the individuals or firms for this purpose. However, such information may need more authenticity or can be mere predictions.