It is important to differentiate Value from Price:
- Value is something intrinsic to the company. It does not vary from day to day. Its variations are exclusively linked to the progress of the business and the evolution of the competitive environment, which will affect the future capacity to grow and generate cash for the shareholders.
- The price is something conjunctural. It depend son other factors, external to the company or the business. It is only visible when a transaction is about to happen. It is mainly affected by the economic environment when the transaction is negotiated and the particular interests of the buyer and the seller.
It is unusual that price meet value in a corporate transaction. Value is a reference, a range, that helps us understand when a price offer should be considered as acceptable.
The calculation of the value of a company is an exercise that requires high technical knowledge in financial modeling and in the application of rigorous valuation methods.
There is a broad consensus among professionals in the use of the Discounted Cash-Flow method as the most reliable tool for calculating the value of a company. It is perhaps the most complex, but it is also the most reliable.
There are other methods, which try to simplify the exercise, such as valuation by comparable multiples. These methods can be used as a complement, but never as the main methodology, since the level of simplification that they represent lead, in most cases, to non-reliable results.
When should you ask for Business Valuation Report?
Fundamentally in two situations:
- When analyzing a potential transaction: sale or purchase of shares
- When the parameter “business value” will be considered in the evaluation of the management team and the evolution of the company. This is a practice that is being progressively incorporated by business owners.