4.5.1. Using Multiple Valuation Methods
Although comparable companies, precedent transactions, and discount cash flow analyses are advanced valuation techniques, there is no foolproof method for determining a company’s exact value. Therefore, it is a good idea, and a common practice, to perform multiple valuation methods in hopes of gaining the most accurate range for a target company. Often, all three of the methods described in this chapter are used to produce valuation ranges to compare to each other. (Assuming they are all appropriate to the target company; you still would not want to use precedent transactions analysis to value an IPO, because the issuer in an IPO cannot expect to receive a control premium, unlike the seller in an acquisition.) Valuation ranges from different methods can be combined into a narrower, more precise valuation range. However, this process is not as simple as taking the overlap of the ranges. The median value produced by each method should also be compared, and the relative applicability of each method should be weighed.
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SUMMARY TABLE Comparison of Valuation Methods |
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Valuation Method |
Advantages |
Disadvantages |
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Comparable Companies Analysis |
• Relies on accessible data to produce easy-to-understand metrics • Provided calculations are based on sound market knowledge, trade values are often an accurate indicator of company worth • Based on known data, and thus predictions of future value are not required |
• Subject to market conditions, which may be temporary • Can be difficult to find truly comparable companies • In the case of volatile or quick-growth companies, comparisons may not be valid |
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Precede | ||