The process of business valuation requires a profound knowledge of the company in order to solve great difficulties when assessing value to a living company, value that can change depending on the management.
Furthermore, nowadays the increasing importance of the intangible assets adds difficulty to the valuation activity as, more and more, the greatest weight of the company’s value does not come from their tangible assets but, instead, from the intellectual capital. (See the paragraph “Global business consultancy: Balanced Scorecard).
- The sale of shares in the stock market.
- Stock market public offerings: Public Offer for the Sales Shares (POSS).
- The purchase of shares from a capital risk society.
- Mergers, takeover bids for securities and joint ventures.
- Leverage buy-outs.
- Stock options plans
- Buy and sell of shares of unlisted companies.
1 - Discounted Cash Flows: The value of a company depends entirely on its capacity to create future wealth. Therefore, the valuating method that should be applied should be based on the discounted Cash Flows.
- Free cash flow (FCF).
- Equity cash flow (ECF).
- Capital cash flow (CCF).
- APV, NPV.
However, sometimes trying to calculate these cash flows can be a difficult process: Because not all necessary information is available, or due to the erratic behaviour of cash flows.
- The accounting book value.
- The adjusted accounting book value.
- The liquidation value.
The due diligence.
- Multiples based on company's value or profitability
- Return on Assets (ROA).
- Return on Equity (ROE).
- Company’s value / EBITDA.
- Multiples based on market capitalization:
- Price Earnings Ratio (PER).
- Earning Yield Gap (EYG).
- Price Cash Flow (PCFR) or Price to Cash Earnings.
- Price to sales (P/S).
- Price to Levered Free-Cash Flow (P/LFCF).
- P/AV (Price Accounting Value).
- Dividend yield.
- Multiples based on company’s growth
- Price Earnings Growth PEG = PER/g .
- (Company’s value / EBITDA)/g .
4 -Mixed valuation methods (Goodwill): A third way is to mix the two previous methods, a mixed valuation approach.
- Classic valuation method.
- Union of European Accounting Experts Abbreviated Income.
- Indirect method.
- Direct method.
- Annual results buying method.
5 - Value creation:
- Economic profit.
- Cash Value Added.
6 - Real options aviation: In case we can incorporate the uncertainty of the cash flows calculation, the best approach would be the real options valuation methodology (real options analysis).
- Options and types of options.
- The binomial method of shares valuation.