RICS enters the business valuation training fray with IVS-compliant "Core Business Valuation Techniques"
The Royal Institution of Chartered Surveyors has made a big leap into business valuation certification--and now training. Their Core Business Valuation Techniques Courses I and II are launching as distance learning (150 hours each) introductory courses as of June 18, 2014. The courses are intended to take 12 weeks each, but since they're self-paced, attendees are welcome to take more time to get through the key materials.
Dealing with RICS can still be daunting for business appraisers. Their web site lists "Land. Property. Construction." on the top. Their on-line find-an-appraiser directory doesn't even have a select for specialists in business valuation (yet).
Yet, compared to other training opportunities, RICS has one major advantage: the courses are the first certification-level business valuation training efforts that match the International Valuation Standards as promulgated by the IVSC. And, as John Barton, the primary designer of the course and the instructor for this first release, points out "a lot of candidates struggle with three days of structured instruction followed by a four-hour test. Self-paced learning allows candidates to spend the time they need to truly master each module."
The new Business Valuation training program is composed of 12 modules covering the following topics:
- Overview of Business Valuation Profession and Standards
- Valuation Introduction
- Business Valuation Methodology
- Data Collection and Analysis
- Levels of Value
- Market Approach
- Income Approach Overview
- Economic Benefits
- Financial Statement Modelling
- Discount Rates
- Country Risk
- Income Approach Valuation Process
RICS intends this new course series for business appraisers who want to become candidates for RICS Professional Membership through Assessment of Professional Competency, Professional Experience or the Senior Professional route (candidates for PER should typically have 2-8 years experience) in business valuation. These certifications have already been available from RICS--but without this new core training program, it's been hard to see RICS as a legitimate international competitor to the ASA, ABV, CVA and other certifications available from North American organizations. Now it is--and with a solid Commonwealth pedigree.
RICS also stresses that "the course will also be beneficial to graduate route delegates, continuing professional development participants, and professionals not seeking a RICS designation, but would like to have a sound understanding of business valuation techniques."
The full course outline is available here--but the key learning elements of the modules are as follows:
Course I
Module 1 - Overview of Business Valuation Profession and Standards
The objectives of this module are to:
- Give an overview of the course outline.
- Define and discuss the role of business valuation.
- Introduce participants to global valuation standards (RICS/International Valuation Standards (IVS).
- Emphasize what it means to be a professional and the importance of professional ethics to the profession.
- Compare business valuation with the valuation of other asset classes, including real property, machinery & equipment, and trade-related property.
- Explain additional dynamics of the business valuation profession associated with international/cross-border transactions.
- Introduce the skills and competencies required to undertake business valuation and to demonstrate during the formal RICS assessment process for membership.
Module 2 - Valuation Introduction
The objectives of this module are to:
- Explore various reasons for undertaking a business valuation. o Introduce the basic elements of a valuation. o Make the participant aware of the possible sources of instruction and the elements to be considered before accepting an assignment.
- Define bases of value.
- Introduce the participant to the three main valuation approaches used in valuing businesses.
- Define the type of interest to be valued and their characteristics (examples include common stock, preferred stock, whether it is private or public).
- Explain the process involved in accepting instructions including agreeing on the valuation date, the purpose of the valuation, the scope of the valuation and the basis of valuation.
Module 3 - Business Valuation Methodology
The objectives of this module are to:
- Present an overview of the three main approaches to business valuation (market approach, income approach, cost approach).
- Discuss when the cost approach may be applied. o Define and discuss other methods such as the “Greenfield” Method and the“asset approach.”
- Understand the basic components of the income approach.
- Understand the Principle of Substitution.
- Appreciate how the income and market approaches are the inverse of each other and how this fact impacts the analysis in each process.
Module 4 - Data Collection and Analysis
The objectives of this module are to:
- Give the participant an understanding of various types of data that should be collected, considered, and analysed.
- Explore and discuss the reliability of various sources of company data.
- Convey the basic components of a company overview, including, historical review, operational overview.
- Learn techniques and best practices for researching economic and industry information.
- Learn to read and understand a company’s financial statements and the associated footnotes.
- Learn the difference between annual and interim financial statements and how to use them.
- Learn how to perform financial statement adjustments for non-recurring and non-operating items.
- Review basic financial analysis techniques.
- Understand the treatment of taxes in valuation.
- Learn how to incorporate the usage of common industry and company analysis frameworks.
- Learn how to plan for and utilize site visits and interviews.
Module 5 - Levels of Value
The objectives of this module are to:
- Convey the fundamental differences between the benefits of a control equity position and the disadvantages of a minority position.
- Learn how the liquidity of a stock affects value in terms of periodic cash distributions and the ability to sell stock in the open market.
- Learn how control versus minority positions are determined by the benefits of operational control (or the lack thereof) and how marketability is determined by liquidity.
- Understand the three levels of value: 1) control; 2) minority-marketable; and 3) minority- nonmarketable.
- Correlate between each valuation approach/methodology and the level of value that results from each analysis.
- Learn the empirical research that is available in the market that helps to quantify control premiums, discounts for lack of control and discounts for lack of marketability.
Module 6 - Market Approach
The objectives of this module are to:
- Learn the data sources through which information on public companies can be obtained. o Establish primary and secondary criteria for selecting public companies that are similar to a subject company.
- Obtain and analyse historical financial data for public comparable companies and develop invested capital and equity multiples from the data.
- Understand the sources of data available which quantify the risk associated with size and growth prospects.
- Make size and growth adjustments to multiples to make them relevant to a subject stock.
- Understand how to interpret and rectify differences in value resulting from a comparable analyses.
- Understand the level of value that results from a public comparable company method.
- Understand how to search for market transaction data and develop data into control multiples.
- Learn secondary market approaches such as rules of thumb, prior stock transactions, and buy/sell agreement data.
- Understand the limitations of each and the requirements for using methods as a primary approach
Module 7 - Income Approach Overview
The objectives of this module are to:
- Review and compare the Market and Income Approaches to valuing businesses.
- Explain the steps in using the Income Approach.
- Define and distinguish between equity value and invested capital.
- Review present value techniques and relate their use to finding the current value of future economic benefits of a company or business.
- Explain the concept of capitalization. o Show the benefits of sensitivity analysis in the valuation process.
Module 8 - Economic Benefits
The objectives of this module are to:
- Define various measures of economic benefits (equity measures, invested capital measures).
- Discuss the selection of appropriate benefit streams.
- Learn when to use the equity method versus the invested capital method.
- Highlight adjustments to prepare target company financials.
- Define working capital and explain its significance.
- Incorporate and understand seasonality issues.
- Identify, value, and incorporate liabilities into the valuation.
- Explain how to use the footnotes to the financial statements to better understand the economic benefits of the company and to make appropriate adjustments.
- Discuss how to deal with real-world issues in defining and measuring economic benefits.
Module 9 - Financial Statement Modelling
The objectives of this module are to:
- Instruct the participant in building historical and forward-looking financial models in Excel.
- Explore the responsibility of the valuer with respect to financial forecasting and questioning management’s views.
- Understand financial forecasting methods and account relationships.
- Learn how to use financial ratios to project a firm’s balance sheet.
- Emphasize the benefit of reality checks and using sensitivity analysis in building a dynamic model.
- Learn how best to deal with uncertainty in forecasts, data, and data availability.
Module 10 - Discount Rates
The objectives of this module are to:
- Differentiate discount rates and capitalization rates.
- Distinguish between an equity discount rate and the weighted average cost of capital.
- Explore different types of risk and the relationship between risk and return.
- Explain various risk/return theories, including the Capital Asset Pricing Model (CAPM) and International CAPM.
- Explain the components of the CAPM, including the risk-free rate
- Explain different models for unlevering and relevering betas.
- Define the capital structure and the use of a target or ‘optimum’ capital structure.
- Explain the concepts of projection periods, growth rates, and the “mid-year discounting convention.”
- Revisit the levels of value from Course 1 in the context of income approach assumptions.
- Explore common errors, real-world issues, and best practices.
Module 11 - Country Risk
The objectives of this module are to:
- Understand the basic components of country risk, including currency risk, political risk, and economic risk.
- Develop a basic understanding of the key international economic theories which explain the fundamentals of the flow of capital around the world.
- Understand why currencies fluctuate in value against each other.
- Understand the basic models used to quantify country risk within the CAPM.
- Learn the basic ways of applying credit default swap spreads on sovereign bonds to determine country risk.
Module 12 - Income Approach Valuation Process
The objectives of this module are to:
- Walk the participant through the entire process of valuing a business under the income approach. o Reinforce best practices in researching and selecting appropriate data and inputs used in building a discounted economic benefit model.
- Discuss and justify the use of capitalization and terminal value methodologies.
- Work through the complete process of forecasting financial statements, calculating various economic benefits, calculating appropriate discount rates, and building and income-approach model for a case company.
- Apply premiums/discounts.
Course II
Module 1 - Overview of Business Valuation Profession and Standards
Gain the knowledge and ability to operate as a technically skilled practitioner, in a way society expects of those within professional capacity, in particular:
- Explain the role of a business valuer.
- Identify the pertinent sources of applicable business valuation standards.
- Understand the main differences between business valuation and the valuation of other asset classes, including real property, machinery & equipment, and trade-related properties.
- Determine the skills and competencies that they must demonstrate as part of the formal assessment process to become a member of RICS.
Module 2 – Valuation Introduction
Gain the knowledge at an introductory level into valuation, the requirements of the valuation standards and how to apply these to Business Valuation, in particular:
- Understand what constitutes a valuation. o Identify the basic elements involved in the process.
- Define and understand the basic components to include in the terms of engagement.
Module 3 – Business Valuation Methodology
Gain the knowledge and ability to the approaches used in Business Valuations and the different methods that can be applied, in particular:
- Understand the three main approaches to valuing businesses and business interests – a) market approach, b) income approach, and c) cost approach.
- Understand various additional methods that one can apply to valuing businesses and business interests, including the “Greenfield” method and the “asset approach.”
- Understand the differences between valuation approaches and common methods for reconciling disparate results from the three approaches to value.
Module 4 – Data Collection and Analysis
Gain the knowledge and ability to analyse data required for the valuation process and gain a deeper understanding of financial statements, in particular:
- Understand many of the issues related to gathering and analyzing data used in the valuation process, including addressing many of the challenges of collecting and using data for smaller and privately held companies.
- Research and interpret economic and industry data.
- Understand how to use financial statements to obtain important company data not always found on the face of the financial statements.
- Analyse and adjust financial statements and calculate basic ratios for your analysis.
- Understand how the analysis of company operations, the macro and micro-economy, the industry, and the financial analysis contribute to quantifying a subject company’s rate of return.
Module 5 – Levels of Value
Demonstrate the three levels of value and how the assumptions lead to a level of value, in particular:
- Understand the three levels of value including control, minority-marketable, and minority- nonmarketable.
- Understand how the assumptions behind each approach to value lead to a specific level of value. o Understand the empirical data in the marketplace that supports control premiums, discounts for lack of control, and discounts for lack of marketability.
Module 6 – The Market Approach to Value
Demonstrate the differences of equity and invested capital methods, gain an understanding into market methods, in particular:
- Understand the differences between equity and invested capital methods of analysis.
- Understand the process for identifying and analysing prospective public comparable companies.
- Develop public market multiples from comparable company financial data.
- Apply multiples to subject company metrics.
- Identify and select transaction data and develop data into market multiples.
- Understand the usefulness and limitations of other market methods including rules of thumb, prior transaction in the subject company’s stock, and company prescribed formulas.
Module 7 - Income Approach Overview
Gain an understanding of the income approach to valuing businesses and understand the theory behind techniques, in particular:
- Explain the basic components of the income approach to valuing businesses. o Identify the difference between equity value, enterprise value, and invested capital.
- Understand the theory behind and apply present value techniques and capitalisation methodologies.
Module 8 – Economic Benefits
Gain an understanding of the different invested capital and equity income streams and understand how to deal with issues as they arise, in particular:
- Understand how to match economic benefit streams to the appropriate owners of those streams.
- Understand the difference between invested capital and equity income streams.
- Make appropriate adjustments to company financial information for use in the valuation model.
- Read and use the footnotes to make appropriate adjustments to the financial statements.
- Understand how to deal with issues such as changes in working capital, seasonality, and liabilities.
Certificate in Core Business Valuation Techniques
Module 9 – Financial Statement Modelling
Gain the knowledge and ability to determine the important factors and sources of projections and the tools required for financial forecasts, in particular:
- Build a financial statement model in Excel.
- Understand the responsibility of the valuer in financial forecasting and when to question projections provided by company management.
- Determine important factors and sources of projections.
- Understand the common tools for developing financial forecasts.
- Appropriately organize and model assumptions and test assumptions using sensitivity analysis.
- Deal with uncertainty in forecasts, data, and data availability.
Module 10 – Discount Rates
Gain an understanding of the relationship between risk and return and understand how each level of risk is measured, in particular:
- Understand the relationship between risk and return.
- Understand volatility as a proxy for risk and the measurement of volatility using a beta.
- Understand levels of risk and how each is measured.
- Understand the portfolio theory and the derivation of the capital asset pricing model.
- Match various discount rates to their corresponding capital structures.
- Rationalize projection periods, growth rates, and the usage of “mid-year discounting.”
Module 11 – Country Risk
Gain an understanding of the basic international theory explaining why currencies fluctuate in value, in particular:
- Understand the components of unsystematic risk.
- Understand basic international economic theory and why currencies fluctuate in value.
- Analyse and quantify country risk as a component of unsystematic risk in the CAPM.
Module 12 – Income Approach Valuation Process
Demonstrate the ability to use appropriate data in calculating the basic components of a discounted economic benefit module, in particular:
- Collect and use appropriate data in calculating the basic components of a discounted economic benefit model for a target company.
- Apply each of the steps in process of using the income approach to valuing a business.