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The Business of Business Valuation

The topic of business valuation is frequently discussed in corporate finance. Business valuation is typically conducted when a company is looking to sell all or a portion of its operations, or looking to merge with or acquire another company. The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business.

A business valuation might include an analysis of the company's management, its capital structure, its future earnings prospects or the market value of its assets. The tools used for valuation can vary among evaluators, businesses, and industries. Common approaches to value a company include a review of financial statements, discounting cash flow models and similar company comparisons.

Methods of Valuation

There are many ways a company can be valued these include:

1. Market Capitalisation

Is calculated by multiplying the company’s share price by its total number of shares outstanding. 

2. Times Revenue Method

Revenue is measured over a period of time, a multiplier is applied which depends on the industry and economic environment. 

3. Earnings Multiplier

The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current PE ratio to account for current interest rates.

4. Multiple of EBITDA

A multiplier is applied to the earnings of a company before interest, taxation, depreciation and amortisation (EBITDA). This multiplier varies dependent upon market conditions, and the likelihood of EBITDA improving or remaining at the current levels.

5. Discounted Cash Flow (DCF) Method

This method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value.

6. Book Value

This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total assets.

7.  Liquidation Value

This is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today.

This is not an exhaustive list of valuation methods. Fairmountain focusses on EBITDA as a guideline but may well use other aspects of forward cash-flowing dependent upon how the acquisition is to be structured. The use of the Fairmountain Valuation Tool TM simplifies these methodologies and translates them into easy to understand component parts to try to give a simplified but realistic current business sale value.