Reliable valuation is crucial to the success of the privatization programme. Fair market value is almost universally accepted as the cash equivalent or the price at which property changes hands between a willing buyer and a willing seller, both being adequately informed of the relevant facts and neither compelled to buy or sell. The valuation of PE as a going concern normally employs one of several different methods mainly of calculating future cash flows and then discounting them by the cost of capital. The replacement value is the cost of replacing a particular PE while investment value refers to the investment required for entry into a similar business. Liquidation value is the net amount an owner can realise is business is terminated and the asstes sold off piecemeal.
Book value is the sum of the assets accounts, net depreciation and amortization.
The valuation exercise thus requires experience, expertise and skills in assessing the likely values of assets, liabilities, future earning potential and business prospects. Besides the financial characteristics, the valuation of a PE is affected by different non-economic factors normally not associated with private sector business organizations. Since PEs are owned and controlled by the government, it is but logical for the government to carry out the privatization process. Prospective investors will therefore evaluate not only the present business and assets but also examine implications on future earnings and liabilities as a consequence of such conditionalities. Due to the conditions regarding employment and its terms, the degrees of freedom that are available to investors while deciding on the redundent work force and their emplyment conditions will be drstically narrowed.