Business Valuations
Data-Driven Valuation Insights
Business valuations are required whenever a company is looking to raise funds, sell a stake, merger and acquisitions, financial reporting, etc. Under all these transactions, the company is required to determine fair value of its equity.
WAs per IVS 05 Valuation Approaches and Methods of the International Valuation Standards, the following three approaches are used.
- Asset Approach
- Income Approach
- Market Approach
Asset Approach
Business valuations are required whenever a company is looking to raise funds, sell a stake, merger and acquisitions, financial reporting, etc. Under all these transactions, the company is required to determine fair value of its equity.
WAs per IVS 05 Valuation Approaches and Methods of the International Valuation Standards, the following three approaches are used.
Income Approach
The Income Approach serves to estimate the value of a specific income stream with consideration given to the risk inherent in that income stream. The most common method under this approach is Discounted Future Cash Flows. The Discounted Future Cash Flows (DCF) method discounts projected future cash flows back to present value at a rate that reflects the risk inherent in the projected earnings.
Hence the two key ingredients of this approach are:
Hence the two key ingredients of this approach are:
- Future cash flows
- Discount rate
Market Approach
Also known as the Comparable Company or Relative Valuation method, this approach determines a company’s value by applying valuation multiples derived from stock market valuations of comparable listed companies. It is based on the principle that market prices reflect all relevant factors considered by informed buyers and sellers. Comparable companies are selected based on turnover, products, services, business environment, profit margins, and scale of operations. Appropriate multiples are carefully chosen and adjusted for differences, while outlier multiples that are negative or significantly above or below industry averages are excluded to ensure reliable valuation results.