Valuation of a company
A valuation of a company is an expression for determining the value of a business. There are different valuation methods, each with their own advantages and disadvantages. It is not a simple exercise to determine what a company is worth, as the value of a company is often influenced by many different factors. Nevertheless, in many situations, knowing the value of your business and its assets is a critical commercial consideration. Different purposes of a valuation can be, for example:
- Mergers and acquisitions.
- Valuation of potential synergy effects when acquiring a company.
- Restructuring your business.
- Involvement in a dispute or lawsuit.
- Reviewing the overall business plan for your company, including evaluating new market opportunities or other strategic objectives.
What creates value in your business?
There are several different factors that can add value to your company, but ultimately it is the profitability that a potential buyer is willing to pay for. Other factors that affect the value of your company include:
- Expectations of the company's future growth.
- Special rights, trademarks, patents, license agreements, etc.
- Customer and supplier relationships.
- Stability in the company's earnings base.
- The market situation - including risks and opportunities in the market.
- Management and competencies in the company.
- Dependence on existing owners.
- Company reputation (goodwill).
- The general interest rate level.
How do you value a company?
The most common methods used to determine the value of a company can be divided into two groups - relative and fundamental valuation methods. Regardless of which valuation method you use, there is ultimately only one correct price, and that is the trading price that a seller and a buyer can agree to trade at. There are advantages and disadvantages to both types of valuation methods, so it is always a good idea to apply different methods to cross-check the results and create a more comprehensive picture of the company's value.
Relative valuation methods
Relative valuation techniques refer to a business valuation that determines the value of a company compared to what competitors and other industry peers are worth. A company's value can be estimated by looking at trading multiples based on publicly listed companies or transaction multiples based on previous transactions. Both techniques use multiple analysis to calculate a peer group average that can be applied to the company's financial metrics. It is common to look at revenue, EBITDA, and/or EBIT multiples, depending on the specific characteristics of a given company and its industry.
Fundamental valuation methods
Fundamental valuation techniques refer to a business valuation method that uses discounted cash flows to determine the value of a company and seeks to find the intrinsic value of the company. A company's value can be estimated by calculating the present value of the forecasted future cash flows using the internal rate of return. Unlike relative valuation methods, fundamental valuation methods do not assume a company's value based on what its competitors are worth. Instead, fundamental valuation methods only take into account the company's fundamental metrics such as dividends, cash flows and growth rates.
Are you considering selling or completing a succession in your company?
If you are a business owner considering selling your business or completing a succession in the foreseeable future, it is important to know the value of your business. For many business owners, it can be difficult to put a monetary value on their life's work, which is only natural, since you as a business owner has invested both emotions, time, and energy into the company, which are difficult to quantify. Nonetheless, the value of your company must be determined sooner or later. The earlier you get started, the greater the chances of a successful outcome. To make the process smoother, it is therefore always a good idea to engage specialized advisors, who can help you calculate and communicate the value of your company.
How we can help with valuing your company
At Grant Thornton Corporate Finance, we have an experienced and dynamic approach to valuations. We can help you whether you are a startup, an SME, a large corporation, a fund or a publicly listed company. We can assist you with whatever valuation needs you may have, including equities, companies, intangible assets, projects or complex financial instruments.
We acknowledge that you need advisors with expertise in your industry. Our team is structured in a way that gives you access to our in-house experts whenever you need them, and we work with over 700 valuation experts across more than 60 countries through Grant Thornton's global network.
If you would like a valuation of your company or a preliminary discussion about how we can help you in the best possible way, then do not hesitate to contact us.