Many ACCA AFM questions on business valuations are based upon the classic concept of 5 – 4 = 1. Remember, I wrote the official ACCA AFM article on this topic and so this will not be a surprise.

Let me remind you if I may.

To find the added value you will first of all find the pre-acquisition value of each company. This is the 2 + 2 = 4. The methods of valuation for the buyer & seller will be clearly specified.

This is followed up by finding the post acquisition value. Once again the method of valuation will be told to you clearly. This is 2 + 2 = 5.

The 5 – 4 = 1. The ‘1’ being the added value caused by synergies. How we share the ‘1’ between the buyer & seller is part of purchase consideration evaluation.

However, not all ACCA AFM business valuation questions are of this type. Especially those with a corporate reconstruction angle. Let’s take an example.

Linus & Nalpak

Linus Co is planning to buy Nalpak Co. Both are accountancy training companies. However,Linus trains exclusively online and provides high quality support to its students.

Nalpak is a more traditional training company. It has old fashioned training centres. It also has an online presence. The latter has potential to be enhanced by adopting the modes of delivery & student support provided by Linus

Nalpak equity is currently valued at $40m. They have agreed to be purchased at a 25% bid premium by Linus.

Once Linus purchases Nalpak it intends to :

a) Close all the training centres & sell off the assets at their net realisable value.

b) Subsume the online training business and upgrade to Linus’s standards. The value of the subsumed business will be based upon future free cash flows discounted at Linus’s WACC

c) Nalpak’s debt of $12m will be taken on by Linus Co.


At this stage, you will be asked to prepare the valuations with the data provided in the exhibits. Expect to see FCF Co, Revised WACC, Asset Valuation and P/E methods.

Let’s say we have completed this and the outcome is as follows:

Linus pays 40 x 1.25 = $50m for Nalpak

Post acquisition Nalpak’s:

Training centres are sold at their NRV of $19m

Online business is enhanced by Linus and the PV of future FCFco discounted at Linus’s WACC is $45m. Remember this is Ve + Vd.

Hence total equity value of Nalpak to Linus is 19 + 45 – 12 = $52m

So the value added to the Linus shareholders is 52 – 50 = $2m.

As you can see, this is not quite the same as ‘5 – 4 = 1’. Please keep that in mind when answering ACCA AFM questions, especially those that appear in Q1 under Corporate Reconstructions & Business Valuations.