Companies must use as many measures as possible to reach a valuation as it will become easy to get a better perspective about the company's value.
FREMONT, CA: When people are on the buy-side or sell-side, determining an accurate business value is a key to extracting value from a deal. Those who are better at valuing assets are the most successful investors of all time. Even though a successful integration will add value to a deal, paying the right price for a business offers the best platform to do so.
There are various strategies for assessing a company's value. They do not have to be an expert in all of them because mostly the buyers settle for o
ne or two, with the second mostly helping to validate the figure given by the first process, but there is no excuse for not mastering at even one. By learning at least one business
valuation method, companies can avoid being one of the thousands of acquirers who annually overpay for assets.
Discounted Cash Flow Analysis
Inflation-adjusted future cash flows are used in discounted cash flow analysis to forecast a project value. DCF Analysis is based on the idea that free cash flows provide value to shareholders, so FCF is the only number that counts. The issue then becomes how to reliably project discounted FCF several years into the future using a weighted average cost of capital (WACC).
Capitalization of Earnings Method
The capitalization of earnings process is a simple, back-of-the-envelope technique for estimating a company's value, and it's what DCF Analysis uses to measure perpetual earnings (which is, all the earrings that happen after the terminal year of the DCF Analysis being conducted). The Capitalization of Earnings Method, also known as the Gordon Growth Model, needs the company's growth and cost of capital to stay stable.
EBITDA Multiple
The EBITDA multiplier is an ideal way to the arbitrary nature of most valuation frameworks. Even Aswath Damodaran, the father of current valuation, insists that every business valuation must conform to the rule of parsimony, which states that the simplest of two (or more) opposing theories should prevail in a debate.
