Valuation
What is it?
It is the process used to estimate how much a company should be worth. The three main valuation methodologies for valuing a company as a going concern are: (1) comparable company analysis, (2) precedent transactions analysis, and (3) discounted cashflow analysis
Key Features
- Identify comparable companies. Ideally, the comparables used are those that are in the same sub-sector and have similar financial and business characteristics as the company. An in-depth understanding of the company is crucial in determining the appropriate comparable companies to include.
- Calculate trading multiples. This involves calculating the comparables’ trading multiples such as P/E, P/B, EV/EBITDA, EV/EBIT, etc. The financial statement figures used in the multiples are often adjusted to remove effects of non-recurring items and recent events
- Use the trading multiples to value the company. This involves using the mean, median, high, and low of the selected trading multiples to establish a valuation range for the company.
- Identify comparable acquisitions. This involves looking at historical M&A transactions on similar companies. It is ideal that the transactions selected had similar market conditions and deal dynamics as what the company being valued is experiencing.
- Calculate transaction multiples. This involves calculating the transaction multiples implied in the acquisition price. It is ideal that the transactions selected had similar market conditions and deal dynamics as what the company being valued is experiencing.
- Related party fees and transactions. Fees and transactions of the joint venture with related parties should be properly disclosed in advance so that each party can assess whether there are any preferential treatments or conflicts of interest that may arise
- Use Transaction Multiples to value the company. Like comparable company analysis, a valuation range is established using the mean, median, high, and low of the selected transaction multiples.
- Discounted Cash Flow Valuation. It is an absolute valuation method that estimates the company’s value based on its future cash flows.
Key Considerations
- Potential synergies
- Unlocking value
- Used as purchase price
- Stronger financial position
- Shows the strength of the operational and financial strategy of the company
- Gives a good glance into the expected outlook of the company
- Subjective especially with the assumptions
- Assumptions are held constant which is not always realistic
- Metrics vary per industry per company
- Requires clear and detailed agreements