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Valuation Techniques

CORPORATE VALUATION METHODOLOGIES
“What is the business worth?” Although a simple question, determining the value of any business in today’s
economy requires a sophisticated understanding of financial analysis as well as sound judgment from market and
industry experience. The answer can differ among buyers and depends on several factors such as one’s
assumptions regarding the growth and profitability prospects of the business, one’s assessment of future market
conditions, one’s appetite for assuming risk (or discount rate on expected future cash flows) and what unique
synergies may be brought to the business post-transaction. The purpose of this article is to provide an overview
of the basic valuation techniques used by financial analysts to answer the question in the context of a merger or
acquisition.
Basic Valuation Methodologies
In determining value, there are several basic analytical tools that are commonly used by financial analysts. These
methods have been developed over several years of research and refinement and are based on financial theory and
market reality. However, these tools are just that – tools – and should not be viewed as final judgment, but rather,
as a starting point to determining value.
It is also important to note that different people will have different ideas on value of an entity depending on
factors such as:
u Public status of the seller and buyer
u Nature of potential buyers (strategic vs. financial)
u Nature of the deal (“beauty contest” or privately negotiated)
u Market conditions (bull or bear market, industry specific issues)
u Tax position of buyer and seller
Each methodology is fairly simple in theory but can become extremely complex. These tools include:
u “Trading Comps ” – Analysis of Selected Publicly Trading Companies
4 Implied values based on multiples of comparable companies that are publicly traded
4 Very relevant especially if there are publicly traded competitors
u “Deal Comps” – Analysis of...