Valuation

Valuation is the determination of a value for a company or a shareholding, regularly expressed as a range rather than a single figure. In practice three approaches are calculated side by side and cross-checked. The capitalised earnings and discounted cash flow methods discount future surpluses to the valuation date at a risk-adjusted rate. Multiple-based methods derive value from factors observed at listed comparables or in comparable transactions, usually applied to EBITDA or EBIT. An asset-based approach may provide a useful additional perspective for very asset-heavy or low-earning companies. A possible valuation floor is better assessed from achievable liquidation proceeds after liabilities and winding-up costs.

In Germany the IDW S 1 standard provides the framework for expert valuations, for example in compensation cases, estate settlements or corporate law situations. The term should be distinguished from the two measures covered separately in this glossary, pre-money and post-money valuation, which are used exclusively in financing rounds and denote the value before and after the new capital comes in. Those two figures are the result of a negotiation over a shareholding rather than an expert valuation. A further essential distinction is between value and price: value follows from a calculation based on assumptions, price from supply, demand and negotiating position. In a well-run auction the price achieved regularly exceeds the value determined by an expert, without either figure being wrong.

In practice the result is frequently presented as several ranges side by side, with the overlap between them carrying the actual message. It should also be noted that the methods operate at different levels: multiples on EBITDA lead to enterprise value, from which equity value, the amount that reaches the seller, only remains after deducting net debt. The occasion for a valuation also dictates the method, since corporate law compensation cases require consideration of the economic circumstances and applicable valuation requirements. For listed companies, the share price can also play a material role.