In: Finance
explain the message on business analysis & valuation given below "VALUATION IS THE ANSWER", SO "WHATS THE QUESTION"
-All values are not created equal – for example a company’s equity value can be vastly different than its enterprise value. Therefore, before beginning any valuation analysis, it is important to establish what type of value is being determined. Common valuation terms that relate to a company’s capital structure are equity value, enterprise value and invested capital value
-Equity Value – Equity value is the value of a company allocable
to its equity investors. Equity value is the most
commonly-determined value as it represents the value of an
investor’s ownership interest in a company.
-Invested Capital Value – Invested capital value represents the
combined value of a company’s interestbearing debt and equity.
Invested capital value provides an indication of the value of the
company as a whole, regardless of how it may be financed. A/P,
accrued expenses and other non-debt liabilities are typically not
considered part of “interest-bearing debt” for the adjustment from
equity value to invested capital value (and vice versa) because
these liabilities are part of a company’s net working capital, not
its equity/debt capital structure
Enterprise Value – Enterprise value is calculated based on the
following formula: Enterprise Value = Equity Value + Debt -
Cash
There are two income-based approaches that are primarily used when
valuing a business:
- Capitalization of Cash Flow Method
- Discounted Cash Flow Method
Other methods involve:
Guideline Public Company Method The Guideline
Public Company Method values a business based on trading multiples
derived from publicly traded companies that are similar to the
subject company. The steps in applying the Guideline Public Company
Method include:
1. Identifying comparable public companies
2. Adjusting the guideline public company multiples for differences in the size and risk of these companies compared to the subject company
3. Applying the adjusted pricing multiples from the
representative companies
Guideline Transaction Method The Guideline
Transaction Method values a business based on pricing multiples
derived from the sale of companies that are similar to the subject
company. The primary steps in the Guideline Transaction Method
include:
1. Finding transactions involving the purchase of comparable companies
2. Selecting the transactions that closely mirror the company’s operations and which occurred in similar industry and economic conditions
3. Applying the indicated pricing multiples from the representative transactions
Conclusion
Valuing a privately-held company is much more involved than simply
typing a ticker symbol into Yahoo! Finance. It also is much more
involved than just applying an estimated multiple to the company’s
EBITDA. I hope you have gained a better understanding of the
valuation methods that are most frequently used in the valuation of
privately-held companies.