H&S & Partners values your company based on the following valuation methods: Equity value, Income valuation and the Comparative value.
The equity value takes into account the assets of the company, after correction of eventual unrecognized gains or losses on these assets. Gains arise because some assets are being depreciated and the resulting book value is lower than their market value or because some assets have seen their value go up. This method does not take earnings into account the earnings potential of the company, only the assets that are present at a particular moment in time. The best known method of the asset type is called the adjusted net book value.
Income valuation methods do not look at assets but work on the basis of the income the company earns. This method is more dynamic as it takes into account the future earnings stream of the business. The best known method is the discounted cash flow method or DCF. Another one for example is the dividend discount model of Gordon Shapiro.
Finally there are the methods based on value comparison. They consist in comparing the value of the company with comparable firms the value of which is known. This is usually based on multiples computed from transactions in the same sector or on the basis of stock exchange valuations.
Most common are the Price/Earnings (P/E) ratios and the EV/EBITDA (or Enterprise value/earnings before interests, taxes, depreciations and amortization), EV (enterprise value/earnings before interest and taxes) or EV/Sales. The ease with which these methods can be used makes them also rather dangerous, especially for SME’s. It is difficult to find similar businesses, and what is the value of comparing a large, liquid, stock exchange listed company, to a small, very illiquid, SME? Moreover, when based on the multiples of different transactions, it may be extremely difficult to separate the true value of the business from ,say, the willingness to pay a premium over the objective value.
The application of the various methods described, results either in a valuation range, or in a unique value, based on a weighted average of the different methods. The weights assigned to each particular method will depend on its appropriateness for each type of enterprise.
The adjusted net book value method finds its primary use in the case of valuing holdings, of for industrial and production companies. It is less frequent in the valuation of service companies, and it is being used more frequently in SME’s. It also serves as a check on other methods.
The DCF method is the most relevant one, and is being used for industrial as well as service companies. It is more readily used in large companies, where a business plan is often readily available. Small companies often do not have a business plan, which puts a brake on the use of this method.
We have alluded to the dangers of comparison based methods. As a result they are primarily used as a check on other methods.
The valuation of your business is therefore a complex issue and will be tailor-made for your company.