Contingent Claim Valuations

Contingent Claim Valuations (CCV) is a revolutionary development in valuation techniques, to recognise the value of assets whose cash flows are contingent on a future event occurring. Typical examples would be the development of a pharmaceutical drug, an unknown oil field, or the development of a new product, innovation or service, with huge risk and uncertainty.

Earnings Valuations have some difficulty dealing with these firms having unused assets, or where the value of the assets cannot be easily linked to future cash flows.

CCV techniques sometimes use option valuation theory to value the underlying options present in many of these assets. Discounted cash flows techniques tend to understate the value of these assets, or punish them with higher discounting rates (higher WACC).

Real Options Valuations (See Real Options) tend to value these underlying options as a set of managerial rights to wait, grow, expand, use flexible operating processes or even abandon a project or the use of the asset even after the investment ahs been made. This technique removes a huge dysfunction that currently exists, between project investment decison making, and managerial flexbility.

Valuation of intangibles and Brands which employ methodologies to value intangible assets that are indentifiable, separable and capable of systematic valuation. Brand valuations are an example. There are three main approaches to value intangibles namely:

  1. Cost
  2. Market Value
  3. Economic Value
Key benefits of carrying out an earnings based valuation and/or contingent valuations are:
  1. They allow firms that are going concerns to value their ability to generate free cash flows in the near and far term;
  2. They make an estimate of the WACC and the ability of these future free cash flows to create wealth;
  3. They estimate the terminal value of the company and therefore capture the effect of the company’s intangible assets like branding, intellectual capital etc;
  4. They permit the owners an intelligent and economically way of transiting from the business; and/or
  5. Provide for effective Succession Planning.
If you do have any questions please feel free to contact Allan Rodrigues on allan.rodrigues@thebusinessfarm.com.au  

The Business Farm has experienced practitioners in this field of valuations with considerable market experience. Allan Rodrigues specialises in Real Options Valuations and brand valuations,  particularly for high risk, uncertain projects.