What are the best practices for weighting valuation techniques in a blended analysis?

1 Understand the context

The first step in weighting valuation techniques is to understand the context of the valuation. You need to consider the purpose, the audience, the industry, the stage, and the availability of data for the company or project you are valuing. For example, if you are valuing a mature company in a stable industry for a merger or acquisition, you may want to give more weight to CCA and PTA, as they reflect the market conditions and the prices paid by similar buyers. On the other hand, if you are valuing a startup in a high-growth industry for a fundraising round, you may want to give more weight to DCF, as it captures the future potential and cash flows of the company.

2 Use multiple sources

The second step in weighting valuation techniques is to use multiple sources of information and data to support your valuation. You should not rely on a single source, such as a financial statement, a market report, or a broker's opinion, as it may be biased, outdated, or inaccurate. Instead, you should use a variety of sources, such as industry databases, analyst reports, news articles, and interviews with management, customers, and competitors, to cross-check and validate your assumptions and inputs. By using multiple sources, you can reduce the uncertainty and error in your valuation and increase your confidence and credibility.

3 Adjust for quality and reliability

The third step in weighting valuation techniques is to adjust for the quality and reliability of each technique and its inputs. You should not treat all techniques equally, as some may be more suitable and reliable for your valuation than others. For example, DCF may be more reliable if you have reliable forecasts and discount rates, but less reliable if you have uncertain growth rates and terminal values. Similarly, CCA may be more reliable if you have comparable companies with similar characteristics and performance, but less reliable if you have to make significant adjustments for differences. PTA may be more reliable if you have recent and relevant transactions, but less reliable if you have to account for synergies and premiums. You should assign higher weights to the techniques that have higher quality and reliability, and lower weights to the ones that have lower quality and reliability.

5 Test and validate

The fifth step in weighting valuation techniques is to test and validate your weighted average valuation. You should not simply take the arithmetic average of the results of each technique, as it may not reflect the true value of the company or project. Instead, you should test and validate your weighted average valuation against other indicators and benchmarks, such as market capitalization, enterprise value, book value, replacement cost, or intrinsic value. You should also compare your weighted average valuation with the historical and expected performance and cash flows of the company or project. By testing and validating, you can check the reasonableness and accuracy of your valuation and adjust your weights if necessary.

6 Communicate and justify

The final step in weighting valuation techniques is to communicate and justify your valuation and your weights to your audience. You should not present your valuation as a single number, as it may not convey the complexity and uncertainty of your analysis. Instead, you should present your valuation as a range of values, with a base case, a best case, and a worst case, to show the potential upside and downside of your valuation. You should also explain and justify your choice of valuation techniques and your weights, with clear and logical arguments, evidence, and assumptions. You should highlight the strengths and weaknesses of each technique, the sources and quality of data, the adjustments and sensitivity analysis, and the validation and comparison methods. By communicating and justifying, you can persuade and convince your audience of the value of your valuation and your weights.

7 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?