How To Choose

Valuation
Methods
A Useful Guide
Introduction

Valuation methods can be a complicated Valutico is the world’s leading

business valuation software. Designed
area for practitioners. This guide provides for professionals, the platform
simple considerations to get you started simplifies the process of making fast
and accurate business valuations by
as well as key insights to help you make providing critical data, and automatic
reports.
smart valuation decisions.
If you find the advice in this guide
useful, the Valutico platform may be a
However, for more advanced information, useful tool to help you perform highly
accurate valuations in minutes.
it’s recommended to consult a Valutico
expert for further guidance or training.

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Three Valuation Approaches
This approach calculates the value of a company based on its ability to
generate income or cash flows in the future. The main method used is:
INCOME Discounted Cash Flow (DCF) Method
Assumptions: Assumes that the company will generate cash flows in the future
and that these cash flows will grow at a stable rate, discounting the future cash
flows to a present value.

Data: Detailed financial projections, such as revenue, expenses, capital

expenditures, working capital, tax rates, and discount rate.

This approach calculates the value of a company based on its market value
relative to other similar companies.The two main methods used are:

MARKET Comparable Company Analysis

Assumptions: Assumes that similar companies are trading at similar multiples,
and that the company being valued can be compared to these companies.

Data: Publicly available market data, such as market capitalization, P/E ratio,
price-to-book ratio, EV/EBITDA, and revenue growth rate.

Comparable Transaction Analysis

Assumptions: Assumes that the value of the company can be derived from the
value of comparable companies that have been sold in the past.

Data: Details of comparable transactions, such as transaction size, transaction

date, type of transaction, and relevant financial metrics.

This approach calculates the value of a company based on the value of its
underlying assets. One example method is:

ASSET Asset-Based Valuation Method

Assumptions: Assumes that similar companies are trading at similar multiples,
and that the company being valued can be compared to these companies.

Data: Publicly available market data, such as market capitalization, P/E ratio,
price-to-book ratio, EV/EBITDA, and revenue growth rate.

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The First Questions to Ask

1. What All valuations require making assumptions about the

future performance of the company being valued. If
assumptions the assumptions used are inaccurate or unrealistic, the
am I making? valuation can be inaccurate or misleading.

For example:

In valuing a company with a new product in development,

the assumptions made about the product’s potential market
size, adoption rate, and pricing can significantly impact the
valuation.

In valuing a company in a volatile industry, the assumptions

made about the company’s growth rate, market share, and
pricing can significantly impact the valuation.

2. Am I using Different valuation methods can provide different

perspectives on the value of a company, and combining
multiple multiple methods can lead to a more comprehensive and
methods? accurate valuation.

For example:

In valuing a mature company with stable cash flows,

combining the Discounted Cash Flow (DCF) method with the
Price-to-Earnings (P/E) multiple method can provide a more
comprehensive view of the company’s value.

In valuing a startup, combining the Venture Capital (VC)

method with the Risk-Adjusted Discount Rate (RADR) method
can provide a more comprehensive view of the company’s
value.

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3. What do I A deep understanding of the company being valued,
including its financial performance, management team,
know about competitive landscape, and industry dynamics, is crucial
the company? for making accurate valuations.

For example:

In valuing a company in a niche market, knowledge of the

company’s position within the market, its competitors,
and its potential for growth is essential for making an
accurate valuation. In valuing a company with a complex
ownership structure, knowledge of the ownership and control
arrangements, including any legal or contractual restrictions,
can be important for making an accurate valuation.

4. What’s the The accuracy of a valuation depends heavily on the quality

of the data used. If the data is incomplete, outdated, or
quality of unreliable, the valuation may be inaccurate or misleading,
the data? or you may need to use a different method.

For example:

The Discounted Cash Flow (DCF) relies on accurate financial

data to make projections of future cash flows. Incomplete or
unreliable financial data can lead to unreliable projections and
inaccurate valuations. As a result, the DCF method may not be
suitable for a company with incomplete or unreliable financial
data.

The Market Approach relies on comparable company data to

arrive at a valuation. If there is a lack of comparable data or the
data available is unreliable, it can be challenging to determine
an accurate valuation using this method. For example, if
a company operates in a niche industry and there are few
comparable companies to benchmark against, the market
approach may need to be supported with a DCF.

The Asset-Based Approach relies on the value of the company’s

assets and liabilities to arrive at a valuation. This method may
be more suitable for companies that have tangible assets,
such as manufacturing companies or real estate investment
trusts (REITs). If a company’s assets are difficult to value or
its liabilities are difficult to quantify, it may be challenging to
determine an accurate valuation using this method.

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The Top Considerations

Valuation Identifying the purpose of a valuation is crucial because it determines

the appropriate valuation method to use. Different purposes require
Purpose different approaches to the valuation process.

When valuing an SME, the purpose of the valuation could vary depending on
the situation. For instance, if the purpose of the valuation is for investment
or acquisition, then the valuation method used will be different from when
the purpose is for regulatory compliance.

For example, if the purpose of the valuation is for investment, the

Discounted Cash Flow (DCF) method may be used to estimate the future
cash flows that the SME is expected to generate.

On the other hand, if the purpose of the valuation is for regulatory

compliance, then the Asset-Based Approach may be used to estimate the
value of the SME’s assets.

Another example would be if the purpose of the valuation is for tax

purposes, the Market Approach may be used to determine the fair market
value of the SME by comparing it to similar SMEs in the market.

If the purpose of the valuation is for litigation, then the Cost Approach may
be used to determine the cost of replacing the SME’s assets.

Data The availability of data can have a significant impact on the type of
valuation method used when valuing an SME. The amount and quality
Availability of available data can limit the types of valuation methods that can be
used.

For instance, if there is limited financial data available for the SME, then the
Income Approach may not be feasible. This is because the Income Approach
relies on projected future cash flows, which require a significant amount of
financial data to estimate. In such a case, either the Asset-Based Approach
may be more appropriate since it relies on the value of the SME’s assets, or
the Comps Approach.

On the other hand, if the SME operates in an industry where there is a

lot of market data available, then the Market Approach may be the most
appropriate valuation method to use. This is because the Market Approach
relies on comparing the SME to similar companies in the market.

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Company The stage of a company can affect the choice of valuation method
used.
Stage
Startups may have a limited track record of financial performance, and
may therefore require a more qualitative and forward-looking approach
to valuation, such as the venture capital (VC) method or the ‘scorecard’
method.

Early-stage companies may have some revenue or earnings, but are still in
the process of developing their business model and scaling their operations.
Valuation methods such as DCF analysis or Comps may be used, but may
need to be adjusted to reflect the higher degree of uncertainty and risk
associated with early-stage companies.

Later-stage companies with a longer operating history may have more

historical financial data available, which may allow for a more quantitative
approach, such as discounted cash flow (DCF) analysis or comparable
company analysis (Comps).

Economic The economic stage of the economy can impact the choice of
valuation method used when valuing SMEs.
Conditions
During a period of economic growth, income-based methods such as DCF
analysis may be more appropriate because of the expectation of future
growth. During an economic boom, a fast-growing tech startup may use DCF
analysis to reflect the high growth expectations of the industry.

During a recession or economic downturn, asset-based methods such as the

cost approach may be more appropriate as there may be a higher degree
of uncertainty around future growth prospects. For example, a mature
manufacturing company may use the cost approach due to the focus on
physical assets in the industry.

We hope this guide has provided useful insight. If you would like to
learn more please reach out to the Valutico team who can provide more
information about our training and consultancy services. The final section
elaborates on the Valutico platform for those interested in learning more.

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What is ?

The ultimate tool for finance professionals who

need accurate, reliable valuations at their fingertips.

Allowing you to access data, integrate it with your preferred

valuation method, and export reports in a single-click,
Valutico streamlines your valuation process.

900,000 transactions 50,000 peer companies

28 valuation methods Benchmark key metrics
Edit key parameters Global coverage
Customizable reports Trusted by 600+ firms
 How works
Step 1
Qualitative Assessment

Assess the company related to its peers to

establish risk and discounts.

Step 2
Choose Peers & Transactions

Access 3TB of global leading market data

on comparable companies and private transactions.

Step 3
Business Plan

Upload your business plan in seconds, or choose

from the automatically generated projections.

Step 4
Final Results!

Download your report.

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