Why is business valuation important?

• Business valuation helps in understanding the true worth of a company, which is crucial for strategic planning and decision making.

• It plays a vital role in attracting investors by providing a clear picture of the investment’s potential value.

• Valuation is essential for legal and tax matters, including estate planning, litigation support and tax compliance.

• Accurate business valuation improves negotiation leverage during mergers, acquisitions, partnership agreements and business sales.

• Benchmarking business performance through valuation helps in comparative analysis, setting performance goals and tracking progress over time.

Business valuation methodologies

At CORNERSTONE PARTNERS, we use the following three main valuation techniques, when we value a business.

Discounted Cash Flows (DCF) analysis is an intrinsic value approach where an analyst forecasts a business’s unlevered free cash flow into the future and discounts it back to today at the firm’s weighted average cost of capital (WACC).

A DCF analysis is performed by building a financial model in Excel and requires an extensive amount of detail and analysis. It is the most detailed of the three approaches and requires the most estimates and assumptions. A DCF model allows the analyst to forecast value based on different scenarios and even perform a sensitivity analysis.

For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together.

Discounted Cash Flows (DCF)

Comparable Companies

Precedent Transactions

Comparable Companies analysis (also called “trading multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, EV/Sales or other multiples.

This valuation method provides an observable value for the business, based on what other comparable companies are currently worth. It is the most widely used approach, as the multiples are easy to calculate and always current.

This approach is grounded in the idea that similar companies provide a relevant valuation benchmark because they operate in the same industry, have similar business models, and face comparable risks and growth prospects.

Precedent Transaction analysis is a cornerstone of valuation in mergers and acquisitions, offering a real-world glimpse into how similar transactions have been valued in the past.

This method involves examining completed transactions that are comparable to the current deal in question, providing a framework for understanding the market's valuation of similar companies. By dissecting these transactions, analysts can identify patterns, benchmarks, and multiples that are relevant to the valuation of a company they are considering for acquisition.

This approach not only sheds light on the financial aspects but also reveals the strategic intentions behind M&A activities, as each transaction carries with it the strategic rationale of the acquirer.