Company Valuation
Quoting from Bill Fiduccia as stated inside this company valuation calculator, Valueing a business is always an imprecise science, even with large-cap public companies. For example, is the value of a large public company based on its market price? Its book value? Its potential worth if broken into parts that have more perceived value than the whole? The answer is, there are many ways to determine the value of a company. Perhaps the best way to understand the value of any business, large or small, is to look at who’s doing the valuing and for what purpose. For example, we’ll wager that you would value your family business differently for estate purposes vs. a sale of the business. This is why in many instances, more than one value can be correct.
Three popular approaches to value a privately held company include:
1. Balance sheet approach. This is the easiest way to value a business. It will more often than not, however, produce the lowest valuation. A company’s book value is simply a firm’s liabilities subtracted from its assets. Banks and insurance companies are often valued on this basis. Many analysts believe that using an “adjusted book value” formula will produce a more accurate picture because this method takes into account the fair market value of assets and liabilities rather than a firm’s “historical book.” Liquidation value is another way of using a company’s balance sheet to arrive at a value. In this method, you simply calculate what’s left after the assets are sold and the debts are paid. What’s left is the value.
2. Market comp approach. In this approach, private companies are compared to comparable public companies. For example, if a similar public company is valued at, say, 23 times current earnings, then that yardstick can be applied to determine the value of the private company. When using multiples, private companies are usually adjusted downward because of the lack of liquidity in exchanging shares for cash. Non-financial comparisons might include companies with similar products, markets or industry criteria. Financial comparisons might include size (revenues), EBITDA, cash flow, price to book, price to earnings or M&A comps.
3. Discounted cash flow approach. Simply stated, this means that an analyst capitalizes an anticipated income stream or cash flow in the future. This is accomplished by discounting a company’s future income or cash flow at an assumed opportunity cost of capital. This is called bringing future anticipated income to “present value.” This approach will generally, but not always, produce the highest value.
Author : Nick Gogerty
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