Business valuation is impacted by a multitude of factors such as the subject company’s industry, its stage of development, the source of the invested capital etc., Additionally, the variety of purposes for which business valuations are performed, the influence of local jurisdictional rules and available valuation methods further increase the complexity of business valuation.
Business valuation requires a solid grasp of both how value has been created prior to the valuation date, and how it will continue to be created in the future. The foundation of business valuation is the ability to understand how a company cultivates ideas or concepts and deploys its invested capital, aiming to drive returns in excess of its cost of capital. The process of value creation does not follow a single path, but rather many paths that vary by industry and the company’s position in its life cycle. Understanding this process is at the heart of our extensive valuation experience, whether we are performing a valuation analysis for financial reporting, tax, M&A, strategic planning, business restructuring, or dispute and litigation purposes.
Many have described business valuation as both an art and a science. The scientific and analytical aspect employs a variety of approaches or methods applied not only to the subject of the valuation itself, but also to the development of certain inputs into the measurement (e.g. cost of capital, discounts and premiums). The most commonly used valuation methods include the cost, market or income (DCF) approaches. While the cost approach may be applied on occasion, the income and market approaches are by far the most commonly utilized in business valuation. The income approach measures value based upon the present value of future cash flows of the business enterprise, while the market approach relies upon the application of market multiples of comparable companies or comparable transactions to the subject company.
The art of a valuation lies in the ability to apply these tools in an effective manner, utilizing professional judgment. This type of insight is gained over years of experience across the spectrum of company life cycles, industries, jurisdictions, and valuation purposes, and also calls for a deep understanding of regulators’ and other stakeholders’ requirements and expectations.