In this series of articles we have taken a thorough look at the basic elements of the most important business valuation methods, the income-based methods, the comparables methods and the asset value methods. We devote the closing part of our series to comparing these methods and assessing their applicability.
Nine criteria of business valuation methods
For a clearer view of the business valuation methods we compare them in a table, where we take several assessment criteria into account.
The dilemma of price and value
“Price is what you pay. Value is what you get.” Warren Buffett
The different business valuation methods characteristically lead to vastly different results. Yet there is only one purchase price, which often does not correspond to any of the business valuation results.
Business valuation methods complement each other
We would not like to declare a winner, and identify one viable method to be used in all circumstances. Different conditions, industries and capabilities rationalise the use of different valuation methods. It is not possible to set up just one system of rules to select the appropriate method, at most you can define patterns from practical experience. It is generally true that income-based methods can mostly be used for acquisitions and equity investments, for the valuation of new industries and new technologies. Comparables methods are suitable for the valuation of larger or listed companies, or in cases where valuations using DCF methods are not viable due to the lack of internal data for the valuation of the buyer side for example, or if future cash flows and assumptions contain significant uncertainties. Asset value methods are suitable for defining the minimum value of a business.
To resolve the above dilemma of price and value we could conclude that business valuation methods do not necessarily have to rival each other, they can be deployed well side by side. In fact, in a lot of cases combining different business valuation methods is downright beneficial. If we conduct valuations based on different methods, the business values thus received may define a range for the purchase price, which can be a valuable tool for negotiations during a business acquisition or equity investment deal.
In our series of articles we have reviewed some of the most frequent business valuation methods. We analysed where it is best to use them, and highlighted the strengths and weaknesses of each method.
If you would like to learn more about business valuations or the valuation of a specific company, please contact our financial advisory experts.