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Why Valuation Matters

Valuation determines the economic value of a business, asset or company. Although the goal is to determine the fair market value, there is no one way to be certain of the ultimate price of a company. It depends upon many factors such as industry, sector, valuation method, business projections and economic conditions. A company needs to be valued if it is being bought, sold, or liquidated. As the saying goes, “Beauty lies in the beholder’s eyes”; hence the final value of the company depends upon how a buyer looks at it.

However, a company has to conduct its own professional valuation which typically involves analysis of the financial statements, cash flow models and market reports. Generally we follow multiple valuation methodologies such as the discounted cash flow (DCF), market valuation multiples, and comparable transactions, etc. A strategic buyer may use some of the methods already mentioned, but they will also look at other factors such as company track records and management capabilities.

Unfortunately, too many companies pursuing M&A on both the sell-side and buy-side mistakenly oversimplify valuation techniques in their transaction. As a result, they miss the mark on valuation. This results in transactions that never close, due to unrealistic, unmet expectations.

Valuation services

There are multiple methods to value a company. Different steps must be taken depending on whether one is valuing a business as a seller or as a buyer. Because every business is unique, we customize each and every valuation. That means that if our clients typically do not prepare a forecast of future performance, we will work with them to develop sound projections.

Pricing Your Deal Right

There is no one way to value a business and there are multiple valuation approaches, including Income, Assets, and Market. Valuation can be a very complex process. It can also bring up issues that weren’t previously addressed – such as an owner’s differing interest from the other shareholders. In order to price the deal right, you need to figure out which approach will best work for your company and which one really applies.

There are three primary business valuation theories that fall into the following groups:

  • Income Approach – this applies to a going concern
  • Asset Approach – the asset theory considers a liquidation approach
  • Market Approach – considers value to be related to other companies in a similar line of business

Income Approach

The income approach determines a company’s value based on the income. This may include:

  • Capitalization of Earnings Method
  • Discounted Cash Flow Method
  • Formula Methods (example, using EBITDA x a multiplier)

Asset Approach

In comparison, the asset approach determines business value based on the assets of the company. This is where you might engage an appraiser to discuss value of assets based on market value and possible liquidation.

Market Approach

The market approach decides the value by comparing it to similar companies. A valuation professional will focus on the comparative transaction method. Then, they will appraise competitive sales of comparable businesses to estimate the economic performance of revenue or profits. This works well with publicly traded companies where earnings information is readily available.