MEASURING THE VALUE OF A BUSINESS

COMPANY VALUATION
VALUATION AND VALUE

▸ Valuation is the process and a set of procedures used to

estimate the economic value of a company
VALUATION AND VALUE

▸ Valuation is the process and a set of procedures used to

estimate the economic value of a company

▸ It is used by financial market participants to determine the

price they are willing to pay or receive to effect a sale of a
business
TEXT

VALUATION AND VALUE

APPROACHES TO VALUATION

▸ Business valuation professionals typically apply three

approaches to valuing a business — the cost, market and
income approaches — ultimately relying on one or two
depending on the type of case and other factors.

▸ It’s vital that attorneys and clients who rely on business

valuations understand the basics of each approach.
APPROACHES TO VALUATION
1. COST APPROACH

▸ a bottom-up approach to valuation

▸ also called the asset-based approach

1. COST APPROACH

▸ uses the current value of a company’s tangible net assets

as the key determinant of fair market value.

▸ This approach is typically used where a business is not a

going concern, or where a business is a going concern but
its value is tied directly to the liquidation value of its
underlying tangible assets and investments.
2. MARKET APPROACH

▸ The market approach bases the value of the subject

business on sales of comparable businesses or business
interests.

▸ Under this approach, the expert identifies recent, arm’s

length transactions involving similar public or private
businesses and then develops pricing multiples.
TEXT

COMPARABLE COMPANY ANALYSIS (“COMPS”)

▸ a valuation methodology that looks at ratios of similar public

companies and uses them to derive the value of another business.
STEPS IN PERFORMING COMPARABLE COMPANY ANALYSIS

1. Find the right comparable companies

2. Gather financial information

3. Setup the comps table

STEPS IN PERFORMING COMPARABLE COMPANY ANALYSIS

4. Calculate the comparable ratios

The main ratios included in a comparable company analysis are:

‣ EV/Revenue

‣ EV/Gross Profit

‣ EV/EBITDA

‣ P/E

‣ P/NAV

‣ P/B
STEPS IN PERFORMING COMPARABLE COMPANY ANALYSIS

4. Calculate the comparable ratios

STEPS IN PERFORMING COMPARABLE COMPANY ANALYSIS

5. Use the multiples from the comparable

companies to value the company in question
‣ For example, if the average P/E ratio of the group of
comparable companies is 12.5 times, then the
analyst will multiply the earnings of the company
they are trying to value by 12.5 times to arrive at
their equity value.
TEXT

COMPS ANALYSIS EXAMPLE (STARBUCKS)

3. INCOME APPROACH

▸ When reliable market data is hard to find, the business

valuation expert may turn to the income approach. This
approach converts future expected economic benefits —
generally, cash flow — into a present value.

▸ Because this approach bases value on the business’s

ability to generate future economic benefits, it’s generally
best suited for established, profitable businesses.
TEXT

DISCOUNTED CASH FLOW ANALYSIS (DCF)

▸ a valuation methodology that looks at ratios of similar public

companies and uses them to derive the value of another business.
KEY COMPONENTS OF DCF ANALYSIS

1. Free cash flow (FCF) – Cash generated by the assets of

the business (tangible and intangible) available for
distribution to all providers of capital. Also called
Unlevered Free Cash Flow

2. Terminal value (TV) – Value at the end of the FCF

projection period (horizon period).

3. Discount rate – The rate used to discount projected FCFs

and terminal value to their present values.
STEPS IN PERFORMING DCF ANALYSIS

1. Project unlevered FCFs

2. Choose a discount rate

3. Calculate the terminal value (TV)

4. Calculate the enterprise value (EV) by discounting the

projected UFCFs and TV to net present value

5. Calculate the equity value by subtracting net debt from

EV
STEPS IN PERFORMING DCF ANALYSIS (STARBUCKS)
CONTINUATION OF STARBUCKS EXAMPLE
APPROACHES TO VALUATION
WHY DO COMPANY VALUATION