Business Valuation. The 3 most used methods

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Business Valuation. The 3 most used methods

Valuing a company is a complex and important process, which involves several financial, economic, strategic and operational aspects. The objective is to calculate the market value of a business, considering its potential to generate wealth, its risks and its opportunities.

There are different methods of valuing companies, each with its advantages and limitations. In this article, we will present the 3 most used methods in the market: discounted cash flow (intrinsic valuation), market multiple and equity value.

– Discounted Cash Flows (intrinsic valuation)

Discounted cash flow is a method that is based on the projection of the company’s future cash flows, discounting them at a rate that reflects the investors’ opportunity cost. This method seeks to obtain the present value of the economic benefits that the company can generate over time.

To apply this method, it is necessary to prepare a detailed business plan, with consistent assumptions about the company’s revenues, costs, investments and financing. Furthermore, it is necessary to define the appropriate discount rate, which can be calculated by the weighted average cost of capital (WACC) or the cost of equity capital (CAPM).

Discounted cash flow is a very robust and comprehensive method, as it takes into account the specificities of the business and its ability to create value. However, it is also sensitive to the assumptions adopted and requires a high degree of precision in projections.

– Market Multiples

The market multiple is a method that is based on the comparison between the evaluated company and other similar companies, which operate in the same sector or segment. This method seeks to obtain the relative value of the company, using indicators such as price/earnings (P/E), company value/EBITDA (EV/EBITDA) or company value/net income (EV/Revenue).

To apply this method, it is necessary to identify comparable companies, which have similar characteristics in terms of size, market, profitability and risk. Furthermore, it is necessary to calculate the average or median multiples of these companies, adjusting them taking into account any qualitative or quantitative differences.

The market multiple is a simple and practical method, as it uses public and easily accessible information. However, it is also limited by the scarcity or heterogeneity of comparable companies, which may generate distortions or inconsistencies in the estimated value.

– Asset Value

Equity value is a method based on the company’s balance sheet, adding its assets and subtracting its liabilities. This method reflects the company’s book value, taking into account its net assets.

To apply this method, it is necessary to adjust the values of assets and liabilities for inflation or market value, eliminating possible lags or discrepancies between accounting values and real values.

Asset value is an objective and transparent method, as it uses historical and empirical data. However, it is also static and incomplete, as it does not consider future expectations or the company’s profitability potential.

Evaluating a company is a complex and multidimensional task, which requires technical knowledge and strategic business vision. There is no single or definitive method to obtain the value of a company, but rather different approaches that can be complementary or convergent.

The three most used methods in the market are discounted cash flow, market multiple and equity value. Each of these methods has its advantages and limitations, depending on the context and purpose of the assessment.

Therefore, it is recommended to use more than one method to obtain a range of values or a weighted average of results. Furthermore, it is important to carry out a critical and sensitive analysis of the data and assumptions used, always aiming for a coherent and consistent assessment.

To learn more about these methods and how to prepare a valuation for your company, we encourage the reader to contact a ValuingTools analyst.

Are you looking for an accurate assessment of your company? ValuingTools analysts have the know-how you are looking for:

– Strong knowledge of financial modeling;

– Experience in evaluations and corporate finance departments;

– Strong knowledge of financial markets and the world economy (especially monetary policy);

– Strong accounting knowledge (IFRS and GAAP);

– Ability to understand different industries;


Carry out a free simulation of your business now to find out how much your company is worth: