Business Valuation

Other valuation methods

Mixed method
Marco Vulpiani

"What I have here in my heart is like faith, but not faith.

What I have here in this room is knowledge without proof..
What I have here in my hand is like knowing but deeper
It's why I have faith"
(Marillion, Faith)

Contents
1. The determination of Goodwill
2. Mixed method formula
3. Input of Mixed method
4. Unlevered Mixed method

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Other valuation methods

Mixed method
The Mixed method combines aspects of the equity and income methods,
while attempting to mediate between the advantages and disadvantages thereof.

Equity Methods aspects

Income methods aspects

It considers the size,

structure, and profitability of
the companys assets

It takes historical or future

trends into account

It creates a balance between objectivity

and verifiability needs of the asset base and
the rationality expressed by assessment
of expected income flows and the relevant risks
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Other valuation methods

Mixed method
Goodwill:
Goodwill can be defined as the ability to produce income by making all of the
companys tangible and intangible asset components work synergistically.

Goodwill is the value that is generally recognized by those that have invested
resources and capitalized energies over time, in order to bring the company to
a certain level of operation.

The exchange value of an operating complex can be of a different amount that

the values of the individual elements, specifically due to the efficiency or
inefficiency of their coordination(*).
(*) Guatri L., 1975
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Other valuation methods

Mixed method
Goodwill:
Is an intangible component that is not adequately represented
in corporate balance sheets;
Sometimes, goodwill is simplistically understood as a substitute
concept of the company s intangible components (e.g.
trademarks and image), while at other times it is, more correctly
considered separately.
It can be either positive (in which case the term goodwill is
used), or negative (in which case the term badwill is used),
when the expected profitability is insufficient to ensure an
adequate return on invested capital.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Other valuation methods

Mixed method
Goodwill:

Equity Value

Goodwill

BV

Book Value

EqV

Goodwill = Theoretical value of equity Book Value of shareholders' equity

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Other valuation methods

Mixed method
The Mixed goodwill valuation method highlights the value of goodwill
understood as the difference between the result of the income valuation
approach (Wr) and the net asset value (K).
The economic value of the company is based on two elements:
shareholders equity expressed in current values (K)

Value of assets

the goodwill or badwill attributable to equity in relation

to a firms ability to produce a positive or negative
excess return compared to a normal rate of return
achievable by the same business.

Value of goodwill

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Contents
1. The determination of Goodwill
2. Mixed method formula
3. Input of Mixed method
4. Mixed method unlevered

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Other valuation methods

Mixed method
Formula:

W = K' + an i (R iK') + SA
W

= theoretical current economic

value of the company

K'

= value of shareholders equity at

fair value

= average income expected over

the long-term

an i = discounting of a deferred income that

is equal to the excess or lower
earnings (R - iK), with a duration of
n years at a rate of i
SA = surplus assets

K' is the adjusted shareholders equity value, without considering the value of
the assets that are not instrumental to company operations SA;
i is the normal rate of return on risk capital invested, by sector of origin (Cost of
Equity, Ke);
i' is the financial discount rate (equal to the return on risk-free assets, rf).
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

Contents
1. The determination of Goodwill
2. Mixed method formula
3. Input of Mixed method
4. Unlevered Mixed method

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

10

Other valuation methods

Mixed method
Adjusted shareholders equity determination:

Adjusted shareholders equity K stems from the valuation, at current market

value, on a going concern basis, of all assets less all liabilities.
1
2
Steps of
valuation

identification of the book value of shareholders equity

assessment of any difference between the current value and
the book value of assets and liabilities in the balance sheets
calculation of theoretical tax from accounting delta

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

calculation of adjusted shareholders equity

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Other valuation methods

Mixed method
Adjusted shareholders equity determination:

Measurement of the book value of shareholders equity does not generally

raise practical problems:

Book Value = Paid-up capital + Equity reserves + Net profit - Dividends

In the measurement of the Book Value any distribution of dividends that have
already been approved or are in the process of being approved has to be
taken into account.

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Other valuation methods

Mixed method
Determination of the i, i rates and of the reference time horizon (n):

The definition of the time horizon is based on a limited term of profit.

It assumes that the conditions generating a greater than normal income cannot
last over the long term and are therefore destined to cancel themselves out or to
fade over the course of a few years.

The prudential nature thereof is clear and should lead to a default valuation of
goodwill.
According to the most widespread practice and doctrine(*) n could vary
between 3 and 10 years.
(*) Guatri L. and Bini M., 2005; Zanda G. et al., 2001
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Other valuation methods

Mixed method
Determination of the i, i rates and of the reference time horizon (n):

i'

The normal interest rate i, applied to the adjusted net capital (K or K) is a

measure of performance that is deemed satisfactory, within the limits of the
norm, while taking into consideration the degree of risk to which the company
is exposed.
The discount rate i is to be understood as the pure financial consideration
for the passage of time. It is thus a means of transferring the values of time ti to
the initial time to: as such, it is independent from firm-specific risk and is linked
to risk free financial parameters
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Contents
1. The determination of Goodwill
2. Mixed method formula
3. Input of Mixed method
4. Unlevered Mixed method

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

15

Other valuation methods

Mixed method
Asset side application of Mixed method:

Enterprise
Value

Goodwill

EV

NIC

Net Invested
Capital

The Mixed Method can be applied also with an asset side approach:
Unlevered Mixed Method(*)
(*) L. Guatri, M.Bini, "Nuovo trattato sulla Valutazione delle aziende", 2005
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Other valuation methods

Mixed method
Formula:

EV = C' + an i (N iC') + SA
EV = Enterprise Value
C'

= Adjusted value of Net Invested

Capital (with assets and working
capital expressed at current
value)

an i = discounting of deferred profit that is

equal to the excess or lower earnings
(N - iC), with a duration of n years at
a rate of i
SA = surplus assets

= Net Operating Profit After Tax

(Nopat)

C' is equal to the adjusted Net Invested Capital C, with assets and working
capital expressed at current value, without considering the value of the assets
that are not instrumental to company operations SA;
i is the normal rate of return on risk and debt capital invested, by sector of
origin (WACC);
i' is the financial discount rate equal to the return on risk-free assets.
Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Other valuation methods

References
M. Vulpiani, "Special Cases of Business Valuation", McGraw Hill
(Chapter 1, Par. 1.3.3)

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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Other valuation methods

Mixed method

Thank you for Your Attention

Marco Vulpiani. For information contact: mvulpiani@deloitte.it

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