Company Valuation Models

Quite simply, business or company valuation is a process and a set of procedures used to determine what a business is worth. While this sounds easy enough, getting your business valuation done right takes preparation and thought.

Valuation Multiples:

A business valuation multiple template will utilize the most widely used multiples such as the price-earnings ratio (P/E ratio or PER) which is popular in part due to its wide availability and to the importance ascribed to earnings per share as a value driver. However, the usefulness of P/E ratios is lessened by the fact that earnings per share is subject to distortions from differences in accounting rules and capital structures between companies.

Other commonly used multiples are based on the enterprise value of a company, such as (EV/EBITDA, EV/EBIT, EV/NOPAT). These multiples reveal the rating of a business independently of its capital structure, and are of particular interest in mergers, acquisitions and transactions on private companies. Not all multiples are based on earnings or cash flow drivers. The price-to-book ratio (P/B) is a commonly used benchmark comparing market value to the accounting book value of the firm’s assets. The price/sales ratio and EV/sales ratios measure value relative to sales. These multiples must be used with caution as both sales and book values are less likely to be value drivers than earnings.

Discounted Cash Flow:

A discounted cash flow valuation model template will value a project, company, or asset using the concept of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question.

There are many variations when it comes to what you can use for your cash flows and discount rate in a DCF analysis. For example, free cash flows can be calculated as operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes – change in working capital. Although the calculations are complex, the purpose of DCF analysis is simply to estimate the money you’d receive from an investment and to adjust for the time value of money.

A leverage buyout valuation model template is also availabe and it will, from a timing standpoint, assume that a financial buyer intends to purchase the business and to own and operate it only for a few years, improve its performance, and then sell it in order to achieve a gigantic rate of return.


Company Valuation Models