How Elahi Fusion Consulting can help and support you 

How much is your business worth? This is not a speculative question, or one that should be answered with a ballpark” guess. Attaching an accurate valuation to a company is a critical part of ongoing business strategy. 

The 10 reasons a valuation is necessary or useful:

  • Exit Strategy Planning

    If you are planning to sell your business, it’s a great idea to set a base line value for the business and develop a strategy to improve the profitability to increase the value as an exit strategy. 

  • Co-Investment, Investment and Participation Agreements

    If you are in a partnership or limited liability vehiclean agreement between principals around the valuation of the interest can help to avoid future disputes. A mutually agreed upon value is the starting point for an agreement that is acceptable to all parties.

  • Shareholder or Partnership Disputes

    Then again, things don’t always work out. If an owner decides they want out of the arrangement, an independent business valuation is necessary to arrive at a fair settlement of the ownership interest.

  • Mergers and Acquisitions

    If your strategy includes buying another business or merging with another company, a business valuation will help you determine if the price you are being asked to pay is a fair one. 

  • Business Valuation for share and incentive plans

    Itimportant to have the relevant valuation undertaken as required for the various Tax Authorities and requirements under any plans in place, or to determine how to structure new plans which might be needed.

  • Funding

    When negotiating with banks, family offices, private equity investors and venture capitalists or other prospective investors, an objective valuation will help in defining the terms and value to be used in raising the capital.

  • Litigation Support

    An objective appraisal can help in negotiating a pretrial settlement or, if the matter goes to trial or arbitration, expert testimony can strengthen a case where the value of a business is at issue.

  • Gifts-Tax Planning

    Avoid problems with Tax Authorities by having an accurate, defensible and documented value of any business assets

  • Inheritance and Estate Planning

    Nobody wants to leave their heirs with the burden of paying heavy taxes on a business that was undervalued. Knowing the value of your business is necessary in order to adequately fund a future estate tax liability. 

  • Marital Dissolution

    A fair market value of any jointly owned business interests must be established for an equitable division of assets.

A business valuation is a complex financial analysis that should be performed by a qualified valuation professional with the appropriate credentials. There are many benefits of using a qualified professional, such as:

  • Minimizes the financial risks in a litigation matter 
  • Minimizes the potential tax in gift or estate tax situations 
  • Provides defense in an audit situation 
  • Helps owners negotiate in a sale of their business 

The Valuation Process

There are two general approaches to the valuation of a business – the liquidation approach and the going concern approach. Given the ongoing nature of the businesses concerned, we will focus solely on undertaking a valuation based on a going concern approach. 

What are the main valuation methods?

When valuing a company as a going concern, there are three main valuation methods used:  

  1. Cost approach  
  2. Market approach
  3. Discounted cash flow
This is shown in the diagram below:
Alternative Ways to Value a Busines

The cost approach looks at what it costs to build something and this method is not frequently used to value a company as a going concern. Accordingly, this is seldom used to as a valuation approach.

The market approach is a form of relative valuation and frequently used in the industry. It includes Comparable Analysis Precedent Transactions.   

The Discounted Cash Flow (DCF) approach is a form of intrinsic valuation and is the most detailed and thorough approach to valuation modelling. 

Method 1- Market approach: Public company comparables

Comparing Analysis

Comparable company analysis (also called trading multiples” or peer group analysis” or equity comps” or public market multiples) is a relative valuation method in which we compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios.Multiples of EBITDA are the most common valuation method. 

This method provides an observable value for the business, based on what companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current. The logic follows that, if company X trades at a 10-times P/E ratio, and company Yhas earnings of £2.50 per share, company Ys stock must be worth £25.00 per share (assuming its perfectly comparable). 

One factor that needs to be carefully considered when applying this approach is determining the true underlying profitability of the company – its normalised’ earnings.   

For Private Companies, the comps valuation method can still be used, with an appropriate discount factor to reflect the relative illiquidity in the companys shares.  This discount is typically between 30 and 40%

Method 2- Market approach: Precedent transactions

Precedent Transactions

Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the takeover premium included in the price for which they were acquired. 

These values represent the realised value of a business achieved in a transaction. They are useful for M&A transactions, but can easily become stale-dated and no longer reflective of the current market as time passes. They are less commonly used than Comps or market trading multiples. 

Method 3: The Discounted Cash Flow (DCF) approach

Discounted Cash Flow

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firms Weighted Average Cost of Capital (WACC). 

A DCF analysis is performed by building a financial model in Excel and requires an extensive amount of detail and analysis.  It is the most detailed of the three approaches, requires the most assumptions, and often produces the highest value. However, the effort required for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different scenarios and even perform a sensitivity analysis. 

For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where different business units are modelled individually and added together. 

Proposed Output- Football Field Chart

Given the context and background to the requirement for an intendent third party valuation, we would prepare a formal report our results for all shareholders in the event of a sale or a roll up of the companies and/or redistribution of shares. 

Included in this report will be a summary of the financial information received and analysed, the different valuation methods applied and their results. We would present these results through a football field chart’ to summarize the range of values for the business based on the different valuation methods used. Below is an example of a football field analysis/graph. 

This graph summarizes the companys 52-week trading range (its stock price, assuming its public), the range of prices analysts have for the stock, the range of values from comparable valuation modelling, the range from precedent transaction analysis, and finally the DCF valuation method. The orange dotted line in the middle represents the average valuation from all the methods. 

Valuation Foodball Field Chart

Football Field graph