Services
Business, company and contract valuations
Business valuation is blending financial analysis with market insight.
INTRO
How much is a business really worth?
This question isn’t just for billion-rand mergers or Stock Exchange investors; it matters to entrepreneurs, buyers, sellers and even employees. Business valuation is both an art and a science, blending financial analysis with market insight to determine a company’s true economic value.
At its core, valuation helps answer critical questions:
- Is this business a good investment?
- What price should a buyer pay?
- How does it compare to competitors?
- The answer isn’t always straightforward.
Different methods, from analyzing financial statements to benchmarking against similar companies, can yield different results.
Most Common Valuation Approaches
Asset-Based Valuation
What would it cost to rebuild this business from scratch?
Market-Based Valuation
What are similar businesses selling for?
Income-Based Valuation
How much future profit can this company generate?
The challenge lies in choosing the right approach and interpreting the numbers correctly. External factors like economic conditions, industry trends and even brand reputation can all impact value.
Business Valuation Process
Whether you’re a business owner looking to sell, an investor seeking opportunities, or just curious about how companies are priced, understanding valuation is key to making informed financial decisions.
So, how do we go from numbers on a spreadsheet to a real-world price tag?
Technically, business valuation is the process of determining the economic value of a business or an asset. Business valuations serve multiple purposes, including:
Mergers and Acquisitions (M&A):
Determining a fair price for buying or selling a business.
Investment Decisions:
Helping investors assess the true worth of a company.
Financial Reporting:
Compliance with accounting standards for goodwill impairment testing.
Taxation and Compliance:
Used in estate planning, inheritance tax, and corporate restructuring.
Legal Disputes:
Assisting in divorce settlements, shareholder disputes and bankruptcy cases.
Strategic Planning:
Helping business owners understand their company’s market position and value drivers.
Business valuation as an art and a science
As valuation is an art, various methodologies are employed, some as comparisons to determine a weighted average and others dependent on circumstances.
While there are three primary approaches in valuing a business, the most well-known and common methodology used is the income-based approach where the DFC “Discounted Cash Flow Method” is employed.
According to this methodology, a value is determined based on the ability of a business to generate future income, which is then discounted to a present value.
Typically, this involves analysing a detailed forecast for a 5-10 year period, determining the appropriate discount rate referred to as “WACC” (Weighted Average Cost of Capital) and applying discount techniques to determine business value.
A common alternative valuation is known as the Capitalization of Earnings Method. This valuation assesses a company’s value based on a single year’s normalised earnings and applies a capitalisation rate. It is best used where a business has stable earnings and growth and is typically applied in valuing small businesses.
The Market-Based Approach values
The Market-Based Approach values a company by comparing it to similar businesses in the market. The idea is simple: just as a real estate appraiser looks at the selling prices of similar houses to determine a home’s value, business valuation experts look at comparable companies and past transactions to estimate a business’s worth.
Selling your business
This is particularly useful when a business owner wants to sell their company and needs a realistic price estimate or in the case where a company seeks funding and investors want to assess its fair market value. In listed companies, this involves “CCA” (Comparable Company Analysis), where valuation multiples such as the Price-to-Earnings ratio (P/E Ratio) or EV/EBITDA multiple is applied.
Precedent Transaction Analysis
Closely related Precedent Transaction Analysis (PTA) is applied where valuation multiples are extracted from known deals of past sales of companies and applying these values to the business being valued.
Hybrid approach
In practice, a hybrid approach is often applied by analysts where a combination of methods is employed for a more accurate assessment.
Example
For example, M&A transactions may involve both DCF (income-based) and precedent transactions (market-based) to derive a fair price.
Business valuation methodology
Business valuation is a complex but essential process for financial decision-making.
Each methodology has its advantages and is suited for different business models and situations.
Understanding these values
By understanding these valuation techniques, business owners, investors and financial analysts can make well-informed decisions regarding company value and future strategy.
Economic Conditions
The complexity of business valuation lies in the variables of economic conditions, industry trends, competitive positioning and even intangible factors like brand reputation and customer loyalty.
Company values
A company’s value can shift overnight due to market changes, regulatory shifts, or unexpected events.
Analytical skills
This is why business valuation is more than just crunching numbers. It demands judgment, experience and deep analytical skills.
Interpret results
Investors, business owners, and financial professionals must not only apply valuation techniques but also interpret results within the broader business landscape.
Bridging the gap
In that negotiation lies the true challenge: bridging the gap between financial theory and market reality.