Whati

sVal
ue?
I
naccounti
ngterms,val
ueist
hemonetarywor
thofanasset
,busi
nessent
it
y,goodssold,ser
vicesr
endered,
orli
abi
l
ityorobli
gat
ionacqui
red.I
neconomi
cter
ms,valuei
sthesum ofallthebenef
itsandr i
ght
sarisi
ng
fr
om ownershi
p.

Whati
sEnt
erpr
iseVal
ue?
Enterpri
seVal ue (
frequentlyrefer
redtoas EV—nott obeconf usedwit
h Equi
tyValue, whichisanot hername
for 
Mar ketValue ofacompany )isthecorebui l
dingbl ockusedi nfi
nancialmodel i
ng.Ther easoni sthis:
Enterpr
iseValuei sdesignedt orepr
esentthe enti
re 
valueoft hecompany ’
soperations.Bycont r
ast,Market
Valueisar esidual:itrepresentsthev al
ueoft hecompanyr emai
ningoncethev alueascr ibedt oother
stakeholder
s( non-owner s)hasbeent akenout.
Enterpr
iseVal uemustt hereforeaccountforalloft hedi f
ferencesbetweenMar ketVal ue(remember ,t
his
fi
gureist heMar ketVal ueofacompany ’
s Equit
y orowner ship)andtheValueofOper ati
ons( or 
Oper at
ing
Value)ofaCompany .

Thenetv alueofal l thecl aimsonacompany ’

sasset scanbebr okendownasf ollows:
 Debt : Moneyt hathasbeenl entt ot hecompanybyanot herper sonori nst it
ut i
on.Debthol der shav ea
higherpr iorityt hanequi tyhol der sont hecl aimsoft hecompany ’sasset sandv al ue, sot heygetpai df irst.
Inor dert ogett oEV, wemustaddDebt
   t
ot heMar ketVal ueoft hecompany ’
sEqui ty.
 Cash:  
Moneyt hati sownedbyt hecompany —inot herwor ds, i
t’ssittingont hecompany ’
sbal ancesheet .
Thi smoney ,assumi ngi ti snotr equi redbyt heoper at ionsoft hebusi ness,  coul d beusedt opayof f
exi stingcl aimant s,orst akehol der s.( Forexampl e,t hecashcoul dbeusedt opayof fDebt ;itcoul dal so
beusedt or epur chaseout standi ngshar esi nt hecompany ’
sEqui ty.
)Thust hehi ghert heCashbal ancea
companyhas,t he  l
ess  i
tsoper ationsmustbewor th.Thi sconcepti scount erint uiti
ve:shoul dn’towni ng
mor ecashbeagoodt hing?Yes,i nasensei tis—butassumef oramomentt hatacompany ’sMar ket
Val ue( ofEqui t y)i sf i
xedatacer taindol l
aramount .Thatv aluecanbeascr ibedt oonl yt wosour ces:( 1)
ther esi dualcl aimv alueonacompany ’
soper ationsaf t eral lot herst akehol der shav ebeenpai dof f ,and
(2)t hev alueoft hemoneyont hecompany ’sbal ancesheet .Thehi gher( 2)i s,t hel ower( 1)i s,andv ice
ver sa.Ther efor e,t ogett oEV,  wemustsubt ractCash  from t heMar ketVal ueoft hecompany ’
sEqui ty.
(Thi si sonewayofl ooki ngati t.I npr act ice,Cashi sof tensubt r
act edf rom Debtt ogetani mpor tant
stat ist i
ccal led  NetDebt .NetDebti st hev alueoft heDebtoncebal ancesheetCashhas,hy pothet ically,
beenusedt opaysomeofi toff.Di agr amsbel owwi llexpl aint hedi ffer entway sofconcept ualizi
ngt his.)
 Mi nor it
yI nter est : Thisi sat r
ickyone.Cor por ationsof tenhav eaLi abi lityaccountcal ledMi norit
yI nter est
(MI ).Thi si s a speci alaccount i
ng desi gnat ion f ora speci fi
c scenar i
o:  when a Cor por ati
on owns
most , 
butnotal l
,ofasubsi diarycompany .Ift hati st hecase,t hesubsi diar ycompanyi sconsol i
dat ed
ent irelyi ntot heCor por ation’ sf inanci alst atement s,sot hati twoul dappear ,atf irstgl ance,t hatt he
Cor por ationdoesi ndeedown100% oft hatsubsi di ary .I nf acti tdoesnot ,sot hisLi abili
tyaccounti s
creat edt or epr esentt hev al ueoft heshar esownedi nt hesubsi diarybyot heri ndi vi
dual sorcompani es.
(Simi larly,ther ewi llbeacor respondi ngMi nor ityI nt er estexpenseont heI ncomeSt atementf ort he
Cor por ation,r epr esent ingt hepor ti
onofv aluef rom t hesubsi diar y’soper at ingr esul t
st hatact ual ly
bel ongst ot heot hershar eholder si nt hesubsi diary .)Si ncet hisMIr epr esent st hev alueoft hepar tial
owner shi p(byot her s)i nt hi ssubsi diary ,itshoul dbet r eat edl ikeDebt–t hati s, inor dert ogett oEV, we
 
mustaddMi nor ityI nterest  tot heMar ketVal ueoft hecompany ’
sEqui ty.(Weshoul dkeepi nmi nd,t hen,
thatt his EV st atisti
c wi lli nclude t he ent irev alue oft he company ’s subsi diary ,ev en t hough t he
Cor por ationi tsel fdoesnotown100%ofi t.
)
 Pr ef erredEqui ty : 
Despi t
et hename, Pr efer redEqui typr imar i
lyoper atesasDebt , notEqui t
y .Itisjuni ort o
all ot herf ormsofDebt ,buti tisal soseni ort ot heEqui ty( oft encal l
ed  CommonEqui ty orjust“ common. ”)
Of ten,Pr eferredEqui tycanbeconv er tedt oshar esofCommonEqui ty,hencet hename.I tmay
   be
conv er ti
blet oCommonEqui tybut ,unt i
lt hatt ime, itr ecei v esi nterestandi si nl i
neaheadoft heCommon
Equi tyi nt hecapi talst ruct ure,so i ti s“ prefer red”t ot hecommon shar es.I trecei ves prefer ent ial
treat ment .BecausePr ef er r
ed Equi t
yi sact ual l
ypr i
mar ilyDebtunl essand unt i
li ti sconv erted t o
Equi ty,wemustaddPr
  ef erredEqui ty 
t ot heMar ketVal ueoft hecompany ’
s( Common)Equi ty.
Visually, wecanl ookatt hist wodi ffer entway s:
1.ENTERPRI SEVALUE+CASH =  TOTAL  VALUE
OFALLCLAI MS 2.ENTERPRI SE VALUE =  NET  VALUE OF ALL
CLAI MS
 Typi cally ,inv estmentbanker sandi nv estorsl ookatt hisequat iont hesecondway( t
heNetDebt / NetValue
versi on) .Thi si st heonet obemostf ami l
iarwi t
h.
ANOTHERVI EW OFENTERPRI SEVALUE
Ther ei sanot herwayofl ooki ngatEV:cor easset sv s.non- cor easset s.Cor easset sar eusedt ogener ate
prof i
tf ort hebusi ness;non- coreasset sar et hingsownedbyt hebusi nessbutnotcent r
altoi tsmoney -
gener atingoper ations.
 Cor eAsset s: asset scr i
tical totheoper atingbusi ness, suchasI nv ent or y,
Fi xedAsset s, Account sReceivable,
etc.
 Non- Cor eAsset s: 
asset snotcr i
ti
calt ot heoper ati
ngbusi nesssuchasDer ivati
v es,Cur rencies,RealEst ate,
Commodi ties, StockOpt ions, etc.
Inthi ssense, Cashont heBal anceSheetusual l
y( atleastf ort hemostpar t)i snon- cor e.Unl essit’
scasht hat
thebusi nessneedst ooper ate(suchasdol larbi l
lsinther egi st er satar etai loper ations) , i
tisnotbei ngused
togener atepr of i
tint hebusi nessoper ations.That ’
swhyi tisst rippedouti nEVcal culat ions.( Othernon-core
asset smaybeaswel l
,especi all
yift heycanbesol dof ff orcashwi t
houthar mi ngt heoper ationsoft he
busi ness.Forexampl e,RealEst ateandCommodi ti
escanof tenbesol dwi t
houti mpact i
ngt heCompany ’
s
cash- gener atingoper ations. )
Ther ef oreCashi s( gener ally)anon- cor easset .Ot hersi mi larasset s,suchasMar ket ableSecur i
ti
es,are
simpl yway sofat tempt i
ngt oear npr ofitont hatCash, butar enotcor et ot hecompany ’
soper ati
ons.These
Cash- li
keasset scanal sobesol doff,andshoul dbest r
ippedoutoft heNetDebtCal cul ation.
PRI MARYCOMPONENTSOFNETDEBT
 (+) Shor t-Ter m Debt : Debtwi thlessthanoney earmat ur i
ty.
 (+) Long- Ter m Debt : Debtwi thmor et hanoney earmat urity.
 (+) DebtEqui v alents: Oper atingLeasesandPensi onShor tfalls.
 (–) CashandCashEqui valent s: 
Cash, MoneyMar ketSecur ities, andI nv estmentSecur i
ties
Not icei nt hi sl i
stt hat“ CashandCashEqui valents”isa  subt ract ion  f
rom t hecal culat i
on—CashandCash- li
ke
asset sar et husasor tof“ ant i
-Debt.
”Debtcanal socomei nsev eraldi ffer entf lavor s,butont heBal ance
Sheeti t ’
sal mostal way sbr okendowni ntoShor t-
Term DebtandLong- Ter m Debt .Thi si sbecauseShor t-
Term Debti scomi ngduesoon( withinl esst hanay ear),andt husmustbepai dof forr efinancedi nt henear
futur e.Thi smaybeofi nteresti fthecompanyi shav ingf i
nanci al troubl e—t heduedat eont henear -t
erm Debt
mayt riggerdi ff
iculti
esf ort heCompanyi nt ermsofr epay ment .Thi st ypeofdi ff
icult y,whi chcanendup
beingacr isisundert her i
ghtci r
cumst ances, iscalleda  li
qui dity  pr obl em ( orcr i
sis).

Under
standi
ngEnt
erpr
iseVal
uevs.Mar
ketVal
ue
Nearl
yallval
uati
ontechni
queswil
lfocusonei
therEnt
erpriseVal
ueorMarketVal
ue(orEqui
ty)
.
Techni
quesrelatedtotheval
ueavail
abl
et shar
o  ehol
ders shoul
dfocusonMarketVal
ue(ofEquit
y).
Si
milar
ly,
Techni
quesrelatedtotheval
ueavail
abl
et al
o  lst
akeholders 
shoul
dfocusonEnter
pri
seValue.

Whati
sVal
uat
ion?
Valuationreferstothepr ocessofdet erminingthepr esentv alueofacompanyoranasset .Itcanbedone
usinganumberoft echniques.Anal yststhatwantt opl acev al
ueonacompanynor mallyl ookatt he
managementoft hebusi ness,t hepr ospectivefutureear ni
ngs,t hemar ketvalueoft hecompany ’sasset s,
andi t
scapi t
al st
ructurecomposi t
ion.
Valuationmayal sobeusedi ndeter miningasecur i
ty’
sf airvalue,whichdependsont heamountt hatabuy er
i
sr eadyt opayasel l
er ,
withtheassumpt ionthatbothpar ti
eswi l
lenterthet r
ansacti
on.
Duringt hetradeofasecur it
yonanexchange,sel l
ersandbuy erswilldictat
ethemar ketval
ueofabondor
stock.Howev er,
intr
insicvalueisaconceptt hatrefer
st oasecur it
y’sper cei
vedv al
ueont hebasi soff uture
earningsorot herattri
butesoft heent it
yt hatarenotrel atedt oasecur i
ty’
smar ketvalue.Therefore,thewor k
ofanal ystswhendoi ngvaluati
oni stoknowi fanassetoracompanyi sunder v
aluedorov erv al
uedbyt he
mar ket.
Valuationscanbeper for
medonasset soronl i
abili
tiessuchascompanybonds.Theyar er equir
edf ora
numberofreasonsincl
udingmergerandacqui
sit
iont
ransact
ions,capi
talbudget
ing,i
nvest
mentanal
ysi
s,
l
it
igat
ion,
andfinanci
alr
eport
ing.

Reasonsf
orPer
for
mingaBusi
nessVal
uat
ion
Busi
nessv
aluati
ont oacompanyi
sani mport
antexer
cisesi
ncei
tcanhel
pini
mpr
ovi
ngt
hecompany
.Her
e
ar
esomeoft hereasonst
operf
orm abusi
nessval
uati
on.

#1Liti
gat
ion
Duri
ngacourtcasesuchasani nj
urycase,
divorce,orwher et
hereisanissuewit
htheval
ueofthebusi
ness,
youmayneedt oprovideproofofyourcompany ’swor t
hsot hatincaseofanydamages,t
heyarebasedon
theact
ualwort
hofy ourbusinessesandnotinfl
atedfiguresesti
matedbyal awy
er.

#2Exitst r
ategyplanning
Ini
nstanceswher ethereisapl antosellabusiness,i
tiswisetocomeupwi thabasev alueforthecompany
andthencomeupwi thast rategytoenhancet hecompany ’spr
ofi
tabi
li
tysoast oincreaseitsvalueasan
exi
tst r
ategy.Yourbusi nessexi tstr
ategyneedst ost ar
tearlyenoughbef or
etheexi t,addressingboth
i
nvoluntaryandv olunt
aryt r
ansfers.
Av al
uationwi t
hannualupdat eswillkeepthebusinessreadyforunexpect
edandexpect edsale.Itwillal
so
ensurethaty ouhav ecor r
ectinformati
onont hecompanyf ai
rmarketval
ueandpr eventcapit
allossduet o
l
ackofcl ari
tyorinaccuracies.

#3Buy i
ngabusiness
Eventhoughsel
ler
sandbuy er
susual l
yhavedi
verseopi
nionsonthewor t
hofthebusi
ness,
therealbusiness
val
uei swhatthebuy ersarewi l
li
ngt opay.A goodbusinessv al
uati
onwilll
ookatmar ketconditions,
potent
iali
ncome,andothersi
mi l
arconcer
nstoensurethatthei
nv est
mentyouaremakingisviabl
e.Itmay
beprudenttohi
reabusinessbrokerwhocanhelpyouwiththeprocess.

#4Sell
ingabusiness
Whenyouwantt osel
lyourbusi
nessorcompanytoathi
rdpart
y,youneedtomakecert
ainthaty
ougetwhat
i
tisworth.Theaski
ngpri
ceshouldbeattr
act
ivet
oprospect
ivepurchaser
s,buty
oushoul
dnotleav
emoney
onthetable.

#5St r
ategicplanni
ng
Thet r
uev al
ueofasset smaynotbeshownwi thadepr eci
ati
onschedule,andiftherehasbeenno
adjust
mentoft hebalancesheetf
orvar
iouspossi
blechanges,i
tmayberisky
.Hav i
ngacurrentv
aluat
ionof
thebusinesswi l
lgi
veyougoodinf
ormati
onthatwi
llhel
py oumakebet
terbusi
nessdecisi
ons.

#6Fundi ng
Anobj ecti
vev al
uationisusuallyneededwheny ouneedtonegoti
atewi
thbanksoranyotherpot
enti
al
i
nvestorsf orfunding.Professi
onaldocument
ati
onofy ourcompany’
swort
hisusual
l
yrequir
edsinceit
enhancesy ourcredibi
l
ityt
ot hel
enders.

#7Sell
ingasharei nabusiness
Forbusinessowners,pr
operbusinessv al
uat
ionenabl esyoutoknowt hewort
hofy ourshar
esandber
eady
wheny ouwanttosellthem.Justlikeduri
ngt hesaleoft hebusi
ness,yououghtt
oensur enomoneyi
slef
t
onthetableandthatyougetgoodv aluefr
om y ourshare.

Av aluationisapr ocesst hatinvolvesdefiningthefairmarketvalueofanent it

y .Valuationsmayber equired
i
nmanysi tuations,includingbusi nessr eorganizat
ions,shareholderdi sput es,empl oy eest ockorshar e
optionpl ans,mer gersandacqui sit
ions,andexpr opri
ati
ons.
Mostpr ofessionalsseev aluati
onsasacent ralbasisofproperdeci sion-maki ngforor gani zati
ons,bothi n
thepr esentandi nthef uture.Ev enthoughi tisnotpossibletopr edictt hef utur e,f
orbusi nessestosur vi
v e,
theyneedt opr epareforuncer taint
y.
Businessv aluationisacr i
ti
calf i
nancialanalysisthatneedst obedonebyav aluationexper twhohas
appr opri
atequal ifi
cati
ons.Busi nessowner swhogof orl
ow-costv aluationsof tenmi ssoutont hesigni
ficant
benef i
tsbr oughtbyper for mingaf ul
lvaluati
onanal ysi
susingcer tif
iedv aluat i
onpr ofessi onal
s.Business
owner sar eablet onegot iateat act
icalsaleoftheirenti
ty,
plananexi tstrategy ,acquiref i
nanci ng,andreduce
thef i
nancial r
iskdur i
ngl i
tigati
on.
KeyPr
inci
plesofBusi
nessVal
uat
ion
Thefoll
owingar
ethekeypri
nci
plesofbusi
nessv
aluat
iont
hatbusi
nessowner
swhowantt
ocr
eat
eval
uei
n
thei
rbusi
nessmustknow.

1.Thev alueofabusinessisdef i
nedonl yataspecifi
cpointintime.
Thevalueofapr ivat
ely-
heldbusi nessusual l
yexperi
enceschangesev er
ysi ngleday.Theear nings,cash
posi
ti
on, workingcapit
al,andmar ketcondi t
ionsofabusinessar ealwayschanging.Thev aluat
ionprepared
bybusinessowner safewmont hsory earsagomaynotr eflectthetr
uecurrentvalueofthebusiness.
Thevalueofabusi nessr equir
esconsi stentandregul
armoni tori
ng.Thi
sv al
uationpri
nciplehelpsbusiness
ownerst ounderst
andt hesigni
ficanceoft hedateofval
uationintheprocessofbusinessv aluat
ion.

2.Valuepr imaril
yv ari
esinaccor dancewi t
ht hecapaci tyofabusi nesst ogeneratef uturecashf low
Acompany ’
sv aluati
onisessent i
all
yaf unctionofi t
sf uturecashf l
ow excepti nr aresi t
uationswher enet
assetliqui
dat i
onl eadstoahi gherv al
ue.Thef irstkeytakeawayi nthesecondpr incipleis“future.
”Itimpl i
es
thathistori
calr esult
soft hecompany ’searni ngsbef oret hedat eofv al
uationar eusef ulinpr edict
ingt he
futur
er esultsofthebusinessundercer t
aincondi ti
ons.
Thesecondkeyi nthispr incipl
ei s“cashf l
ow. ”Itisbecausecashf low,whi cht akesi ntoaccountcapi tal
expenditures,wor kingcapi t
alchanges,andt axes,ist het ruedet erminantofbusi nessv alue.Busi ness
ownersshoul daim atbuildingacompr ehensi veest i
mat eoff uturecashf l
owsf ortheircompani es.
Event houghmaki ngestimat esisasubj ectiveunder taking,i tisvitalthatt hev alueoft hebusi nessi s
vali
dated.Rel i
ablehistor
ical informati
onwi llhelpi nsuppor t
ingt heassumpt ionst hatthef orecastswilluse.

3.Themar ketcommandswhatt hepr operrateofreturnf oracqui r

ersis
Marketforcesar eusual l
yinast ateoff lux,andt heygui det herateofreturnthati
sneededbypot ent
ial
buyer
sinapar t
icularmar ketplace.Someoft hemar ketf orcesincludethetypeofindust
ry,f
inanci
alcosts,
andthegeneral economi ccondi t
ions.
Marketrat
esofr eturnoffersignifi
cantbenchmar kindicat orsataspeci f
icpointi
ntime.Theyinfl
uencethe
rat
esofreturnwant edbyindivi
dual companybuy ersov erthel ongterm.Businessownersneedtobewar yof
themarketforcesinor dertoknowt her i
ghttimet oexitthatwi llmaximizevalue.

4.Thev al
ueofabusi nessmaybei mpactedbyunder ly
ingnettangibl
eassets
Thispr i
nci
pleofbusi nessv aluati
onmeasur esoft her el
ati
onshipbet weent heoperati
onalval
ueofa
companyandi t
snett angibl
ev alue.Theoret
ical
ly,acompanywi thahi gherunderlyi
ngnettangi
bleasset
val
uehashi ghergoingconcernv alue.I
tisduet otheav ai
labi
li
tyofmor esecur i
tytofi
nancetheacqui
sit
ion
andlowerriskofinv
est mentsincetherearemor eassetstobel i
quidat
edi ncaseofbankruptcy
.
Businessownersneedt obui
ldanassetbase.Fori ndustr
iesthatarenotcapitalint
ensi
ve,t
heownersneed
tofi
ndmeanst osuppor tthevaluati
onoft hei
rgoodwi l
l.

5.Valueisinfluencedbyt ransferabil
ityoff uturecashf lows
How t r
ansferablet hecashf l
owsoft hebusi nessar et oapot enti
alacquirerwi
llimpactthev al
ueoft he
company .Val uablebusi nessesusual lyoper atewithoutt hecont roloftheowner .Ifthebusi nessowner
exert
sahugecont r
olov ert hedeliveryofser vice,r
ev enuegr owth,maintenanceofcustomerr elati
onships,
etc.
,thentheownerwi llsecur ethegoodwi ll
andnott hebusi ness.Suchaki ndofpersonalgoodwi l
lprovi
des
veryl
itt
leornocommer ci alvalueandi snott ransfer
abl e.
Insuchacase,t hetot
alv al
ueoft hebusi nesst oanacqui rermaybel i
mitedtothev al
ueoft hecompany ’
s
tangi
bleasset si ncaset hebusi nessownerdoesnotwantt ostay.Businessowner sneedtobui ldast r
ong
managementt eam sot hatt hebusi nessi scapabl eofr unningef f
ici
entl
yev enift
heyleftthecompanyf ora
l
ongper iodoft i
me.Theycanbui ldast rongerandbet termanagementt eam throughenhancedcor porate
ali
gnment ,
training,andev enthroughhi r
ing.

6.Valueisi mpactedbyliqui
dit
y
Thisprincipl
ef uncti
onsbasedont hetheoryofdemandandsuppl y.Ifthemar ketplacehasmanypot ential
buyers,butt hereareaf ew qual
i
tyacquisiti
ont ar
gets,t
her ewi
llbear i
seinv aluati
onmultipl
esandv ice
ver
sa.I nbot hopenmar ketandnotionalvaluati
oncontexts,morebusinessinterestli
qui
dit
yt r
ansl
atesinto
morebusi nessi nt
erestv
alue.
Businessowner sneedtogetthebestpotent i
alpur
chaserstothenegotiati
ngtablet omaximizepri
ce.I
tcan
beachiev edthroughacont r
oll
edaucti
onpr ocess.

Theabov
ear
efundament
albusi
nessv
aluat
ionpr
inci
plest
hatdet
ermi
net
hev
alueofabusi
ness.Thev
alue
ofanybusinessisusuall
ydet ermi
nedataspeci f
icpointi
nti
meandi simpactedbythecompany’scapaci
ty
togenerat
ef ut
urecashf low,mar ketforces,underl
yi
ngnettangibl
eassets,tr
ansfer
abi
li
tyoffutur
ecash
fl
ows,andliqui
dit
y.
Alt
houghtheyaret echni
calvaluat
ionconcepts, t
hebasicsoft
hev al
uati
onpri
ncipl
esneedtounderst
andby
busi
nessowner stohelpthem incr
easet hevaluati
onofthei
rbusi
nesses.

Whatar
etheMai
nVal
uat
ionMet
hods?
Whenv alui
ngacompanyasagoi ngconcern,t
her
ear ethreemai nvaluati
onmet hodsusedbyi ndust
ry
practi
ti
oners:(1)DCFanaly
sis,(2)comparabl
ecompanyanal y
sis,and(3)pr ecedenttransact
ions.These
arethemostcommonmet hodsofv al
uati
onusedininvest
mentbanki ng,equityresearch,pri
vateequity
,
corporatedevelopment
,mergers&acquisi
ti
ons(M&A),
lever
agedbuy out
s( LBO),andmostar easoffinance.

Asshowni nt hedi agram abov e,whenv aluingabusi nessorasset,therear

et hr
eebr oadcategori
est hat
eachcont ai
nt heirownmet hods.TheCostAppr oachlooksatwhati tcoststobui l
dsomet hingandt his
met hodisnotf r
equent lyusedbyf inancepr ofessi
onalstoval
ueacompanyasagoi ngconcern.Nextist he
Mar ketAppr oach,t hi
si saf orm ofr el
ativev al
uati
onandf r
equentlyusedint hei ndust
ry.Iti
ncludes
Compar ableAnal y sisPrecedentTr ansact
ions.Fi nal
ly,thedi
scountedcashflow(DCF)appr oachisaf orm
ofintri
nsi
cv aluationandi sthemostdet ai
ledandt horoughapproachtov al
uat
ionmodel i
ng.

Met hod1:ComparableAnalysi
s(“Comps”)
Compar abl
ecompanyanal ysi
s(al
socalled“
tradingmul
ti
ples”or“
peergr
oupanal
ysi
s”or“equit
ycomps”or
“publi
cmar ketmult
iples”
)isar elat
iveval
uationmethodi nwhichyoucompar
et hecurrentval
ueofa
busi
nesst oothersimil
arbusinessesbyl ooki
ngatt r
adingmul t
ipl
eslikeP/E,EV/ EBI
TDA,orotherrat
ios.
Multi
plesofEBITDAarethemostcommonv aluat
ionmet hod.
The“comps”v al
uati
onmet hodprovidesanobservabl
ev alueforthebusiness,
basedonwhatcompani esare
curr
entlywort
h.Compsar ethemostwi delyusedapproach,astheyar eeasytocalculat
eandalwayscurr
ent.
Thelogicfoll
owsthat,i
fcompanyXt radesata10- t
imesP/ Er ati
o,andcompanyY hasear ni
ngsof$2.50
pershare,companyY’sstockmustbewor t
h$25.00pershar e(assumingitsperf
ectlycompar
able)
.

Exampl
eCompsTabl
e

Met hod2:Pr ecedentTransacti

ons
Precedentt r
ansactionsanalysi
si sanot herform ofrelati
vevaluat
ionwhereyoucompar et hecompanyi n
question to otherbusinessest hathav erecentl
ybeen sol d oracquir
ed inthesamei ndustry.These
tr
ansact i
onv al
uesincludethetake-overpremi um i
ncludedinthepri
ceforwhicht
heywer eacquired.
Thesev aluesrepresenttheenblocv alueofabusi ness.Theyareusefulf
orM&At ransact
ions,butcaneasil
y
becomest al
e-datedandnol ongerreflecti
veoft hecurrentmarketasti
mepasses.Theyar elesscommonl y
usedt hanCompsormar kett
radi
ngmul ti
ples.

Exampl
eTr
ansact
ionAnal
ysi
s

Met hod3:DCFAnal ysis

Discount edCashFl ow( DCF)anal y
sisi sanintr
insicv alueapproachwher eananal y
stfor
ecast sthebusiness’
unleveredf reecashf l
owi ntothef utureanddi scount sitbacktot odayatt hefir
m’ sWeightedAv er
ageCost
ofCapi tal(WACC) .
ADCFanal ysi
si sper formedbybui ldi
ngaf i
nancialmodeli nExcelandr equiresanext ensiv
eamountof
detailandanal ysis.I tisthemostdet ai
l
edoft hethr eeapproaches,r equiresthemostassumpt ions,and
oftenpr oducest hehi ghestvalue.Howev er,t
heef f
or trequi
redf orpreparingaDCFmodelwi l
lalsoof ten
resulti
nt hemostaccur ateval
uation.ADCFmodelal l
owst heanal ysttoforecastval
uebasedondi f
ferent
scenarios, andev enper form asensitivi
tyanalysi
s.
Forl ar
gerbusi nesses,t heDCFv aluei scommonl yasum- of-
the-partsanalysi
s,wheredi ff
erentbusiness
unitsaremodel edi ndivi
duall
yandaddedt oget
her .Tol earnmore,seeCFI ’sDCFmodel i
nfographic.
DCFVal
uat
ionModel

Whatar
eVal
uat
ionDr
iver
s?
Valuati
ondri
ver
sr ef
ertof act
orsthatincr
easet heval
ueofabusi nessintheeventofasaleopport
unity
.
Businessowner
sneedt oconsideressenti
alfactor
stoi ncr
easecashf l
ows,aswellasreduceri
sk,thus
enhancingt
heov er
allv
alueofthecompany .Theyneedt ostartmoni
tor
ingthei
rcompany’
sv al
ueanumber
ofyearsbef
oretheyconsideranexi
t.

I
tisessenti
alforapr i
vatecompanyownertorecogni
zeandappr eci
atethev al
uat
iondriver
sthatwil
l
i
mprovecashfl
owsandr educet
heri
sksl
i
nkedtothebusiness.Ther
earenumer ousvaluedri
verst
hatcan
beatt
ri
butedtoabusi ness,someofwhi
charespecifi
ct oparti
cul
arindustr
ies.Below aresomeoft he
uni
ver
salval
uat
iondr
ivers.

Exampl
esofVal
uat
ionDr
iver
s

1.Economi esofScale
Thecost sperunitty
pical
lygodownwi t
hanincr
easeinproductionoutput.I
tmaybet hr
oughthespreadof
capacit
ycost soverbiggervol
umesort hr
oughquant
it
ydi scounts.Acompanyshoul dexpl
oitt
heinternal
economiesofscal ewellthatwoul
dhelpitgr
ow.Companiescanal soreali
zeext
raeconomiesofscaleby
enter
ingi nt
oaj ointventur
e,consor
ti
um,oroutsour
cingt oimpr oveit
sbuy i
ngpower,aswel laslower
expenses.

2.Technology
Smal lcompanieswi t
houtl argemonet aryr esourcesusual l
yl ackadequat er esourcesf orresearchand
development,therebyfindingi tdi
ffi
cultt omat chthechangesi nt echnol
ogyint heirmar kets.Mostoft he
ti
me, suchcompani esar ef orcedtoall
ocat er esourcestoaf ewpr oductdevel
opmentpr oj
ectsorincural ot
ofexpensesi nthenearf uture.Theresultisobsol escenceoft heproductorservice,poorgr owth,
andl ossof
mar ketshar
e.
Howev er,l
argercompani escanshow t echnol ogi
calexper
tisebet terthr
ought hedev elopmentofpr oducts
thataddressemer gingcust omerneeds, luri
ngcust omer si
ntochoosi ngmoder nhi gh-
performancepr oducts.

3.ProductandSer
v i
ceOff
ering
Eventhoughspecial
tyent
it
iesusuallydev
elopt
hei
rstrengt
hbyconcent
rati
ngonni chef
iel
ds,suchf ocus
canleadtori
sksduetooverdependenceonafewmarketsandl
ackofdi
versi
fi
cat
ion.Thel
argestcust
omer s
ofsomeofthesebusinessesmayadoptapol i
cyt oonlydealwi
llsuppl
i
ersof
fer
ingawi devar
iet
yof
pr
oduct
s,compell
i
ngt hem to eit
hersel
loutto abiggercompanyorexpandtheirpr
oductoff
eri
ngs.
Compani
esshoul
dstr
ivetodevelopamixofof
fer
ings.

4.AccesstoCapital
Smallercompani
esusuall
yhavelimi
tedaccesst oequit
ycapi t
alanddebt.Thebusinessmanagersand
ownersofsuchcompaniesneedtoeval
uat
et hetypeofcapit
althatt
heywouldneedtoachievethei
rgoal s.
Theyneedt oknow how thecompanyislev er
agedcurrent
ly,whet
hersharehol
der
smayber equi
redt o
provi
depersonal
l
yguarant
eeloansorequi
ty,orwhethert
heyshouldbri
nginanexter
nalinvest
orandi ssue
pref
erredst
ock.

5.Financi
alPerfor
mance
Throughfinanci
alanaly
sis,acompanycanmeasur etr
ends,i
dent
if
yi t
sliabil
i
tiesandasset
s,andcompare
i
tscondi t
ionandf i
nancialperf
ormancewithsimil
arcompani
es.Financialstat
ementsthatarei
nter
nal
ly
prepared mayimpedet heassessmentofper f
ormancebymanagement ,leading t
othepossibi
li
tyof
prospecti
vebuyersquesti
oningthequal
i
tyofthedat
a.

6.Skil
ledEmployees
Skil
l
edhumancapi t
alisvit
alforanyor ganizat
ion.Companyemploy
eescontr
ibut
eski
ll
s,cr
eati
veabil
i
ties,
experi
ence,andknowledgetot hebusinessaswel lastheheal
thofthecompany’
scul
tur
e.Theemployees
wil
ldeterminet
heeffecti
venessofproductionandservi
cedeli
ver
y.

7.Soli
dCust omerBase
Havingacust omerbasethatissoli
dandwidespreadisi
mportantf
orthecontinuingv
iabi
li
tyofacompany .
Whenbusi nessesgrow andf l
ouri
shbyonlyprovidi
ngservi
cetotheirl
argestcustomers,i
tmayi ncrease
thei
rdependencyuntilwhereahugepor t
ionoftherevenuescomesfrom veryfewcustomers.Businesses
needt omanaget hedistri
butionofcust
omerconcent r
ati
ontomi ni
mizether iskoflosi
ngasubst antial
sourceoft
hecompanyr evenues.

8.Mar ketEnvi
ronment
Businessesareusuallyinf
luencedbyt hedev
elopmentsandeconomictr
endsint heindust
ri
esthatthey
operatein.Thecompany’smanagementneedst odevel
opagoodunderst
andingoftheimpactofeconomic
fact
orsont hei
rindust
ry,
theirmarketshar
eandmarketposi
ti
on,
andthei
runiqueandnicheoff
eri
ng.

9.Br andingandMarketi
ngStrategy
Mar keti
ngr ef
erst
othelinkbetweent heneedsofcustomersandt hei
rresponsetotheproductsorser
vices
ofacompany .A companywi thstrongbrandingwil
limpr ov
eitssal esthroughani ncr
easeinmar ket
recogniti
onandalsogiveitacleardirect
ionthathel
psenhanceoperat
ionaleff
ici
ency.Acompanyshouldt i
e
i
tsbr andt oitsmi
ssionandst rategydir
ecti
onandbeawar eofit
ssalesandmar keti
ngshort
comingsand
capabi l
i
ties.

10.St r
ategicVision
Al argenumberofcompani essimplyformul
atey ear
lybudgetswi t
houttry
ingtoputtogetherl
ong-
ter
m
businesspl ansorf orecaststhatarei
nt unewiththeneeds,tenure,demands,anddemographi
csofthei
r
customer s.Sincevaluati
oni sincl
i
nedtowardsfutur
eprospect
s, t
hemanagementoft hecompanyneedsto
adoptast rategicvi
sioniftheywanttocreateval
ue.

Getti
ngacompanyr eadyf orsaleusual
lytakeanumberofy ears,part
icul
arlyify
ouintendtoyieldmaxi
mum
val
uef ory
ourhardwor k.Continuousassessmentofthekeyv aluat
iondriversofyourcompanyi scent
ralt
o
i
tssuccesssi
nceitwillnotonlyimprovethev al
uat
ionofthecompanybutal soleadtoapr of
it
ableandmore
eff
ici
entcompanyinthel ongrun.
Therearenumerousv aluati
ondr i
ver
sthateachbusinessownerneedst of ocusontoav oidleavi
ngmoney
onthenegoti
ati
ontablewhent heywanttosell.

ht
tps:
//cor
por
atef
inancei
nst
it
ute.
com/
resour
ces/
knowl
edge/
val
uat
ion/
val
uat
ion-
met
hods/