When discussing company valuations, the focus is often on publicly listed companies where the process is relatively straightforward. Where this becomes tricky is valuing private companies, where no market price exists. The question then becomes what is the most appropriate method to reliably value the company?
There are a range of valuation methods available, each of which has its own strengths and weaknesses. The most generally applicable method is a discounted future cashflow (DCF) which involves forecasting the future cashflows of an organisation and discounting them at the required rate of return of investors. This is considered one of the most robust valuation methods given that the discounting technique takes into account the time value of money and utilises the forward-looking income streams to reach the valuation.
On the other hand, there are a lot of assumptions built into this technique. The valuation relies on forecast performance which can often be on the optimistic side and may require some adjustments. Additionally, the discount rate, while informed by market data from comparable public companies, is still an estimate and may not capture all the nuances of a specific private entity. Despite these drawbacks, the DCF method is usually one of the most reliable valuation techniques with the right adjustments and forecasts incorporated.
The nature of the organisation you’re valuing is also an important factor as for some businesses a simple analysis of the cashflows isn’t necessarily the best gauge of value. Take a utility company and a property company for example, in the utility sector the stability and consistency of cashflows are a significant driver of value and therefore the DCF method would be a good fit.
With a property or commodity company you might opt for another method such as the Net Asset Value method which considers the value of a company’s assets as the main driver for enterprise value. This is also a useful backup approach for organisations in financial difficulty or a company being considered for a takeover. However, its reliability can be limited by difficulties acquiring realistic asset valuations, especially for property in weak market conditions. It also often ignores intangible assets such as staff knowledge and skills or other assets like brand strength, distribution channels, and existing client base.
Earnings multiples allow for a simple and easy to understand alternative which provides a presentation of a company’s prospects by taking factors such as a share price or EBITDA and multiplying this by an industry multiple to reach a valuation. This technique can be applied at the company level or to specific business units, allowing for targeted valuations where wider company analysis may be distorting the profitability of individual profit centres. This is a simple and easy to understand methodology but works best when there are very similar companies to compare when calculating the multiple.
Arlingclose provides a comprehensive company valuation service. Our approach combines technical rigour with sector-specific insight, applying a full suite of recognised methodologies. We can build bespoke financial models that allow for scenario and sensitivity testing, ensuring clients can assess valuations under a range of assumptions.
Our valuations underpin strategic decision-making, supporting investment appraisals, business planning, and financial reviews. Our valuations have also been used for year-end accounts and have been reviewed and accepted by major audit firms.
The Arlingclose team uses in-house economic forecasts and extensive market research to inform our analysis. This ensures clients receive robust and analytically sound valuations with a clearly articulated methodology.
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