What is Valuation
Valuation techniques
ADVISORY
What is Valuation
Valuation is the art and science of attributing value to an asset, investment, or company.
Why Perform Valuation
Selling a business
Acquiring a business
Raising money (i.e., IPO)
Investment recommendations (i.e., buy, hold, sell)
Internal business decision-making
Impairment testing
Valuation Is an Art and a Science
Science includes performing:
Historical Financials
Ratios
Statistical Analysis
Art includes understanding:
Microeconomic Factors
Macroeconomic Factors
Forecasting
We must have a deep understanding of the business and where it's going for our forecast to be meaningful!
Valuation Techniques
Mainly there are three categories for valuation techniques:
1- ASSET APPROACH (FMV OF NET ASSETS) INCLUDES TECHNIQUES:
Cost to Build
Replacement Cost
Liquidation Value
2- Intrinsic Value (Income Approach) includes Discounted Cash Flows (DCF)
Intrinsic valuation means looking at a company in isolation without worrying about peers.
Involves: forecasting future performance, calculating future cash flows, and discounting back to the present.
It doesn't directly depend on the mood of the market since we are more focused on the fundamentals of the company.
3- Relative Value (Market Approach) includes:
Public Company Comparables:
Pears are generally easy to find because these companies’ shares are publicly traded on a stock exchange.
We use multiples to find the worth of the company we are trying to value (i.e., Price-to-earnings multiple).
It is more likely to reflect the mood of the market and produce a valuation that is closer to market price than DCF.
Precedent Transactions:
Precedent transactions relate to past mergers and acquisitions.
This form of valuation includes a takeover premium (generally, more money is paid for a controlling position).
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