An inside look at how holding companies (and other similar entities) are valued

We value a significant number of holding companies on behalf of our clients. We broadly define holding companies as:

1. companies or other entities which own equity interests in other companies, and/or;
2. companies or other entities that own various different assets with no association or a loose association with each other (for example, a company which owns a business, listed shares and real property assets).

What makes holding companies unique for valuations?

Most often, companies which require valuation will operate an active asset such as a business. Therefore, the approach to valuing such companies involves valuing the company’s business and adjusting that value to account for any other surplus assets and debt in excess of the business to form a view of the value of the company.

Holding companies however, consistent with our broad definition, own multiple assets. These assets may be somewhat loosely associated with each other. For example, a business’ premises owned by an operating company. Or a labour employing entity and an operating entity which together operate a business. 

Noting the various assets which a holding company will own, a valuer must take time to understand exactly what assets the holding company owns, apply commercial logic as to how these various assets are separated and related to the holding company, and have the knowledge to accurately value each of the underlying assets of the holding company, or the ability to involve specialised experts to deal with specific unique assets on a case-by-case basis.

How are holding companies valued?

In our view, it is prudent to commence the valuation process for holding companies by first considering what assets the company or entity owns. Often we consider matters such as:

1. Are these assets equity interests in other companies? 
2. Are there subsidiary companies which own businesses?  
3. Are there subsidiary companies which operate parts to a business which, together, may be considered a consolidated enterprise?
4. Does the company or its subsidiaries own other assets? If so, what are they.

From here, it is then prudent to identify which assets of the holding company and the broader group can and should be valued. For example, if a subsidiary company owns real property, that real property should be valued as a step in the process of assessing the value of the subsidiary company and thereafter the holding company. Same as if another subsidiary of the holding company owns a business enterprise.

Once each asset of the holding company (and of the subsidiary assets therein) that can be valued is identified, each of these assets should be valued. In doing so, it is vital to ensure that the value ascribed to any single asset does not include value consideration that has already been ascribed to another asset. In other words, no double counting!

Thereafter, any surplus assets and liabilities to those assets valued in each entity should be accounted for to determine the value of each entity in the group. And thereafter the total value, including the value of surplus assets and liabilities can be added up to calculate the value of the holding company.

The method described above, is often referred to as the Summation Method. International Valuation Standards Council, Standard 105 states the following regarding the method:

• 70.8 The summation method, also referred to as the underlying asset method, is typically used for investment companies or other types of assets or entities for which value is primarily a factor of the values of their holdings.
• 70.9 The key steps in the summation method are:
  • (a) value each of the component assets that are part of the subject asset using the appropriate valuation approaches and methods, and
  • (b) add the value of the component assets together to reach the value of the subject asset.

Find Out More

Groves & Partners are expert business valuers. We have significant experience in valuing simple and complex holding entities together with other corporate structures. If you require valuation advice and would like to know more about how we can work with you, contact us on 1300 892 717 (+61 2 7208 7970) or email info@groves.com.au.