Unlisted companies : a valuation investigation

Abstract

Valuation of shares in a company influences many management decisions. The latest example is current legislation which makes it difficult if not impossible for a company to obtain contracts from local and provincial governments, financial institutions and other service providers, without the proper Black Economic Empowerment share-composition of the company. This is just one example of the issues which force companies, especially in the unlisted sector, to establish the value of their shares. The primary objective of this report was to critically investigate valuation procedures for unlisted companies in South Africa. A further objective was to theoretically and empirically investigate existing valuation models and which of these models were currently used by valuators. It was found during the investigation that the unlisted sector was more complex to value than the listed sector because of the difference in overall regulation between the two sectors. All the models researched in the literature were evaluated and those suitable for this sector were selected for in-depth research. The population identified was anyone who is in the business of the valuation of unlisted companies in South Africa. The sample, as a properly representative subset of the population, was identified as 97 valuators. The valuators were auditors, business brokers, attorneys, bankers and accountants. The results of the surveys are reliable, because it was ensured that a proper cross-section of respondents was obtained. A questionnaire comprising of 11 categories was structured and questions grouped to address valuation procedures (Appendix 1). A follow-up questionnaire that focused on different valuation models, including sub- approaches used in the unlisted sector was also constructed (Appendix 2). Because of the perceived complexity of valuations, telephone interviews ascertained that the questions were answered without any ambiguity. Seventy seven percent of the 97 questionnaires were completed. The most insightful information gained was that only 6,7% of the respondents indicated that a standard valuation model/procedure was being used. The survey on the valuation models delivered interesting results. It was found that there is a trend to use the Discounted Cash Flow method (DCF). The Earnings Multiple Method and Price Earnings were still being used amongst the respondents. The results of the studies were documented and factors came up which could be used to design a proper valuation procedure in the unlisted sector.