Valuation, more than a number?
Part 1 of 4 post series on - Valuation Mindset, a Prequate tool for management effectiveness
Value is mostly understood to be the material or monetary worth of something (say, the price at which something is invested in or bought at).
But it’s not just that.
It is most akin to the alternate definition ‘the regard that something is held to deserve; the importance, worth, or usefulness of something’. This requires a shift in thinking. From looking at it an exercise at the time of any equity transaction to a tool to foster effectiveness as a business.
Why/ When/ What/ How you asked.
We thought of putting these thoughts together in few articles to help businesses look at using valuation as the hard-hitting strategic tool that it really is.
What it means today
(we like to call it internally as the what it was)
The value of a business is merely its ability to generate cash flows in the near future. It is more a mathematical procedure at arriving at an objective number rather than the method or rationale. This thinking solved the need at the time, objectivity.
Does that sound about right for most of you?
But this definition stopped short
The value of a business is a lot complex. It is what the business has been able to build internally that allows it to be specially qualified to be valuable.
This is a lot more than the cash flows. The earlier approach fell short in signifying the value of the intangibles in the business, which could far outlive the rows in the DCF model.
What it really is
So what does this all mean to me?
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Wish to read the other articles in the series? Links are below.
Part 1: Valuation, more than a number? This one!
Part 2: The Valuation mindset [ Read ]
Part 3: Finding the right value driver for your business - [ Read ]
Part 4: Using valuation as a strategic tool [ Read ]
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Disclaimer: Please note that these are our views are based on our experience in being advisors and working with various organizations across 20+ industries. They are for the limited purpose of educating the leaders of a company. The rationale and the procedure to be followed can vary significantly based on the context, exact nature & size of the business.
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About me:
A Chartered Accountant by qualification and entrepreneur by passion. I also hold a post graduate in international business strategy from IIFT, Delhi. Currently working with Prequate, a management^finance advisory company in the Strategic Finance Office & Investment Banking, Mergers & Acquisitions verticals. My views on valuation as a subject matter are now a part of the Professional Insights Publications of the Valuation Standards Board of the ICAI.
You could read an expanded version on Prequate's blog: [ Strategic Finance, the new king! ]
More about Prequate? [ Website ] or [ Book some time for a chat ] or email me on nag[at]prequate.in.