How do you compare valuation methods among professionals?

Traditional Methods: 1. DCF: Versatile but often misused. Good for various sectors; Many assumptions. 2. Relative Valuation: Useful in oligopoly sectors ; relies on multiples (adjustments needed usually). 3. Residual Income: Best for banks; focuses on income over required return on equity. 4. Asset-Based: Ideal for asset-heavy firms; provides “floor” value. Quirky Methods: 1. Reverse DCF: Gauges embedded growth rates; lesser assumptions. 2. Top-Down DCF: Starts with TAM, estimates market share, works backward. 3. Greenwald’s EPV: Focuses on current earnings power. 4. Expected Return Framework: Dynamic, quantifies expected returns. Choice Factors: 1. Size 2. Sector 3. Financial Health 4. Data availability 5. Macro conditions

DCF is one my most favourite methods, however, assumptions and projections need to be realistic rather than unachievable and overly optimistic. Organizations and leadership sometimes go overboard with creating a plan or valuing a business more than it’s worth just by going overly aggressive with assumptions to show cash flows which just don’t align with business capabilities and market expectations. This leads to short term benefits such as securing debt or equity financing at the expense of long term goals where investors or financiers can even pull the rug.

Comparing valuation methods among professionals involves assessing and analyzing the various approaches and techniques to determine the value of assets, businesses, or financial instruments. Valuation methods vary depending on the specific context and industry, but there are common principles and criteria that professionals use to evaluate them. Such as: 1. Purpose and Context 2. Industry and Asset Type 3. Review Available Data & Information 4. Review Market Conditions 5. Risk & Uncertainty 6. Comparability 7. Discount Rate & Cost of Capital 8. Assumptions and Projections 9. Sensitivity Analysis 10. Legal and Regulatory Compliance 11. Client Objectives 12. Seek Expert Advice Comparing valuation methods is not a one-size-fits-all process.

During restructuring, assets and liabilities can change significantly, affecting the risk profile and the discount rates used in DCF models. Additionally, restructuring often involves a strategic pivot that could open new revenue streams or close down others, affecting projected cash flows. Moreover, "venture debt" becomes an interesting concept if you're dealing with venture capital. Companies might opt for venture debt in restructuring scenarios as it's less dilutive than equity but more risky than traditional loans. The valuation models here would differ significantly as the risk associated with venture debt would be higher, and thus, the discount rates used in DCF models would also be higher.

I agree, in addition for a clearer view of the business valuation methods we compare them and an outcome of comparing valuation methods helps to create an overall picture and to value a company the best way possible. In a lot of cases combining different valuation methods is downright beneficial. If we conduct valuations based on different methods, the business values thus received may define a range for the purchase price, which can be a valuable tool for negotiations during a business acquisition or equity investment deal.

We have entered a new economic era, and professionals in restructuring scenarios often use four main valuation methods: income, market, asset-based and “Brand Valuation Method” Brand valuation refers to the process of calculating the value of a brand or how much someone is willing to pay for it. Brand valuation is a valuation method through which a brand can ascertain the value of its tangible and intangible assets. Customer perception, financial performance, brand equity, and similar metrics are used to determine the estimated value of a brand from this valuation method. Brand valuation is important in the case of mergers and acquisitions for better financing, to ascertain their return on brand investment, and for budgeting allocations.

?? Synergy Value in M&A: Another layer of valuation comes into play, which is the "synergy value." It's like 1+1=3 in the world of M&A. ?? Venture Capital-Specific Metrics: VCs often use non-standard metrics like LTV/CAC or MRR for SaaS companies. ?? Real Options: In some cases, especially in pharma or resource-based industries, a "real options" approach to valuation is used. This considers the value of future opportunities that a business might be able to capitalize on. ?? Cyclicality and Macro Factors: External economic factors and industry cycles can heavily influence the discount rate or the comparables you choose. This is especially critical in sectors like real estate or commodities.

I have nine criteria for business valuation methods : - Basis of method Required - input data Need for - experts - Advantages - Disadvantages - Limitations Future performance / - strategy - Where to use them - Costs Compare the business valuation methods in a table, where you take several assessment criteria into account…

?? Valuation Purpose and Context: Valuation can change dramatically based on the reason behind it. For instance, a venture capitalist would use a different valuation approach than a bankruptcy court. The VC looks at future growth and cash flows, while the court is more interested in current asset values. ?? Data Availability and Reliability: One can't stress this enough. Valuation is only as good as the data it's based on. Poor data quality can lead to flawed valuations. Data rooms and due diligence are critical stages in any valuation process. ?? Transparency and Documentation: Especially in dispute resolutions or audits, how well you document your valuation process can save you a lot of headaches.

?? Time Horizon: Time horizon is a crucial factor. DCF might not be suitable for startups or high-growth companies with uncertain future cash flows. ?? Market Conditions: Current market conditions can also significantly impact which valuation method to choose. For example, relying solely on historical earnings multiples in a bullish market could undervalue a growth company. ?? Regulatory Environment: In sectors like fintech or health tech, the regulatory environment can have a material impact on the company's valuation. A P/E ratio would fail to capture this nuance.

First, look at profitability level of the companies. Startups which typically pre-EBITDA stage might be valued using revenue multiple. Software companies are typically valued using Annual Recurring Revenue (ARR) Multiples. It is also best to use "growth adjusted" valuation multiples to take into account growth rate the companies

When applying valuation methods, you will need numbers for inputs. However some numbers you need are not of the past but of the future. You will need earnings forecast for this year, next year, or even for next 20 years. You will find these estimates or assumptions are the key to realistic valuation. Math is an easier part. What is tricky and important is how we get reasonable inputs of the future. It will require in-depth study of company and related industry as well as experiences.

?? Ethical Considerations: Valuation is not just a numbers game. Especially in restructuring scenarios, ethical considerations can weigh in. Understanding the impact of your valuation on employees, stakeholders, and even the environment can be crucial. ?? Global Markets: Valuation methodologies can vary by geography due to accounting standards, market maturity, and investor sentiment. It's beneficial to have an understanding of these nuances. ?? Narrative vs. Numbers: Good valuation is the right blend of story and numbers. The narrative will set your expectations (growth, risk, etc.), which you'll back up with numbers. Too often, people focus on only one, missing the big picture.

Valuation methods are essentially the techniques used to estimate the fair value of an asset or company. While there are various approaches out there, the choice of method can vary based on industry, purpose, and even geographical location. As professionals, it is essential to understand the nuances of each method and compare them objectively to ascertain the most appropriate valuation approach for a specific scenario.

All valuation metrics will have a bias. It is important to keep that in mind when looking at valuations. At times some aspects do not get fully considered and can act like blindspots. Depending on the business that is being evaluated, using a range of benchmarking or looking at different ways to value is important.

Comparing valuation methods among professionals involves assessing various approaches, such as discounted cash flow, market multiples, and asset-based methods. Seek consensus by considering industry standards, market conditions, and the specific context of the valuation. Engage in open discussions, share insights, and leverage expertise to arrive at a well-informed and balanced valuation assessment.

The perspective of valuation is also market competitive, regulations, market barriers, tech. advantages etc to measure the risk for disruption.