A company can be separated into its operating businesses or assets and its non-operating assets. Operating assets are typically the principal sources of a company’s revenues, cash flow, and income. The valuation of operating assets can be done using two different fundamental concepts: a liquidation value and a going concern value. Most of the analysis in investment banking and private equity contemplates valuing a business as a going concern, though liquidation valuation is used occasionally, especially when considering distressed companies.
In the liquidation scenario, which is often used in the context of a distressed sale or a restructuring, each asset or small collection of assets of the company is valued independently. This is done when there is little perceived premium for holding these assets collectively. Examples could include a collection of steel mills that may have value on an individual basis but, due to over-capacity in the industry or regional overlap, may not attract interest from a buyer on a combined basis.
Generally, the most common types of valuation seek to determine a going concern value, in which the company being valued is assumed to continue to operate for the foreseeable future. Note that this is the basis upon which auditors typically give their opinions. In this case, the objective is to value the earnings power and cash generation capability of the collection of assets that make up the operating business, as well as any non-operating or intangible assets or attributes that are owned by the company. Non-operating assets may include interests in other companies, while intangible assets may include trademarks, brands, customer and supplier relationships, technology and know-how, infrastructure and systems, management expertise and experience, etc. In most cases, the going concern value exceeds the liquidation value, because the collection of assets produces a greater return when pooled in an operating business than when separated in a liquidation scenario.
When valuing a company, three techniques are commonly used: comparable company analysis (or "peer group analysis", "equity comps", " trading comps", or "public market multiples"), precedent transaction analysis (or "transaction comps", "deal comps", or "private market multiples"), and discounted cash flow ("DCF") analysis. A fourth type of analysis, a leveraged buyout ("LBO") analysis, is often used to estimate the amount a financial buyer would pay for a company. A fifth type of analysis, a sum-of-the-parts ("SOTP" or "break-up") analysis may be used to value a company as the sum of the values of its composite businesses.
Method | Description | Comments | ||
Comparable Companies Analysis |
|
|
||
Precedent Transaction Analysis |
|
|
||
DCF Analysis |
|
|
||
LBO Analysis |
|
|
||
Ability-to-Pay (ATP) |
|
|
||
SOTP Analysis |
|
|