Mergers and Acquisitions - Business Valuation

Business Valuation

The five most common ways to value a business are

• asset valuation,
• historical earnings valuation,
• future maintainable earnings valuation,
• relative valuation (comparable company & comparable transactions),
• discounted cash flow (DCF) valuation

Professionals who value businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit.

Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.

As synergy plays a large role in the valuation of acquisitions it is paramount to get the value of synergies right; synergies are different from the "sales price" valuation of the firm, as they will accrue to the buyer. The analysis should, hence be done from the acquiring firm's point of view. Synergy creating investments are started by the choice of the acquirer and therefore they are not obligatory, making them real options in essence. To include this real options aspect into analysis of acquisition targets is one interesting issue that has been studied lately.