How can you weight valuation methods when assessing a company's worth?

1 Use multiple methods

One of the best practices in valuation is to use more than one method to cross-check and validate your results. For example, you can use a discounted cash flow (DCF) method to project the future cash flows of the company and discount them to the present value, and then compare it with a market-based method, such as a comparable company analysis (CCA) or a precedent transaction analysis (PTA), that uses the multiples of similar companies or deals to estimate the value. By using multiple methods, you can capture different aspects of the company's value, such as its intrinsic value, its market value, and its transaction value.

2 Consider the context

Another important factor to consider when weighting valuation methods is the context of the valuation. For example, if you are valuing a company for a merger or acquisition, you may want to give more weight to a PTA method, as it reflects the premiums and synergies that are expected in a deal. On the other hand, if you are valuing a company for a strategic review or a capital raising, you may want to give more weight to a DCF method, as it reflects the long-term value creation potential of the company. Additionally, you should consider the industry, stage, and size of the company, as some methods may be more suitable or reliable for certain sectors, growth phases, or scales.

3 Adjust for risks

A third tip to weight valuation methods is to adjust for the risks and uncertainties that may affect the value of the company. For example, you can use a sensitivity analysis to test how your valuation results change with different scenarios, assumptions, or inputs. You can also use a weighted average cost of capital (WACC) or a risk-adjusted discount rate to account for the cost and risk of financing the company. Moreover, you can use a valuation range or a confidence interval to express the margin of error or the degree of confidence in your valuation results.

4 Communicate clearly

A final tip to weight valuation methods is to communicate your valuation results clearly and transparently. You should explain the rationale, methodology, and sources of your valuation methods, and highlight the key drivers, assumptions, and inputs that affect your results. You should also acknowledge the limitations, uncertainties, and biases that may exist in your valuation methods, and provide alternative or complementary views if possible. By communicating clearly, you can enhance the credibility, reliability, and usefulness of your valuation results.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?