Corporate valuation is not a perfect science. Indeed, value is perception. Nevertheless, valuation exercises are done with the objective of maximizing the growth of shareholder wealth. Here are a few reasons to ensure you optimize business value:
One of the benefits of corporate valuation exercises is to determine how best to raise capital. The best financial solution is one that minimizes the cost of capital or increases the value of equity. The ensuing financial structure can provide for expansion purposes, mergers, acquisitions, divestitures and restructuring. For private companies, valuation exercises are also important for estate and tax planning.
While a valuation exercise may help in determining what the best financial strategy to adopt is, it will only give an indication of what the value of the company is given the economic, financial and market conditions at that point in time. For a publicly traded company, the value of equity is also dependent on several factors, including but not limited to, the liquidity of the stock, the control structure and who the target buyer is. For a private company, other factors will include family employment, additional benefits, the control over the bonus and dividend policy and the mix of asset ownership.
There are several valuation methods. Asset valuation is a good starting point beginning with book value and then moving on to replacement value, market value and in the case of a company that is no longer a going concern, liquidation value. Assessing the market value of the company as a whole requires access to market data bases whereby a complete comparison of similar companies is done through ratio analysis and industry rules of thumb. The most straight forward, effective and efficient method is the earnings approach, either using a Capitalized Cash Flow or a Discounted Cash Flow (DCF) method whereby the present value of future cash flows is calculated.
This method uncovers the intrinsic value of companies, particularly in the case of highly cyclical situations, avoids the issues of interest rate environment because the rates used in the model are long term rates, and provides a risk adjusted appraisal as it uses expected rates of return. In short, it is a sound quantitative method on which to base discussions around financial strategic planning.
The bottom line… know your bottom line and what your business is worth. Fiscal planning will be a lot stronger.
For help with the project I recommend you contact:
Capital Assist Valuation Inc.