Applying valuation techniques to assess the value of your business

A business valuation is a process for determining the economic value of either a whole company, business unit or division. This can be used for many purposes including fundraising, M&A, shareholder transactions, taxation and divorce proceedings.

Each business has its own set of individual circumstances including market sector, customer base, ownership dynamics, culture, workforce, geographies, financial performance and regulatory environment. 

During a fundraising or M&A event, each party will determine their own approach towards valuing a business transaction, which reflects their deal objectives. For example, a buyer may be looking to boost their revenue growth, improve their gross margins, acquire new technology or increase market share within a particular geography.

Given that each business has its own individual circumstances and each party has their own reasons for entering into a deal, it is no surprise that there many different approaches towards valuing a business. These include the following:

• Market capitalization (mainly for listed companies)
• Enterprise value
• Times-Revenue
• EBITDA multiple
• Discounted cash flow model
• Book value
• Liquidation value

These approaches will give a range of different answers for certain transactions. Each of these methods has its own pros and cons, however some may be considered more appropriate for specific types of deals.

In practice, individual parties often estimate a business valuation by plotting the results from several of these approaches to determine the most appropriate number. They will combine this with an evaluation of their deal objectives and other business considerations when negotiating the price with the deal counter-party.

It is important to remember that shareholder transactions are a negotiation between the buyers and the sellers. Whilst the valuation calculations are important, there are also other factors to consider, such as how motivated the buyer is to buy the business and how much the seller wants to sell it. The percentage of equity offered and circumstances of the deal will also likely have a significant effect on the resulting valuation.