Uncovering the art behind the science of business valuation
How professional business valuators assess the value of private companies
In addition to quantifying the worth of a private company for transactions and other purposes, the valuation process can help business owners understand which factors influence value. But how do valuators go about assessing the value of Private Companies ? Deloitte's specialists discuss the art behind the science.
Determining the value of a private company is both a science and an art, according to the Deloitte specialists who have spent their careers in this practice. Iseo Pasquali, Managing Partner, Financial Advisory, explains what comprises a high-quality valuation: "We take a number of things into consideration — both 'hard' and 'soft' factors. These include the company's past and projected financial performance, management's track
"Valuation is a relative thing. In addition to considering the company's pure numbers - from profit margins and debt to money in the bank - you need to understand the environment in which a company operates."
— Jeffrey Harder
record, the competitive situation, and the business environment. Then we add in the relevant learning we've gained from similar valuation experience, but not without careful attention to the unique circumstances surrounding each situation." Done well, a professional valuation is a roadmap to value creation for private companies.
Valuation requires examining a range of factors
Chartered Business Valuators will typically begin a valuation by asking to see detailed information about the company, including historical financial reports, budgets and forecasts, business plans and sales strategies, customer value propositions and intellectual property. They will also consider the strength of the company's management and its customer relationships.
"But valuation is a relative thing," says Deloitte's Jeffrey Harder, a Vancouver-based partner. "In addition to considering the company's pure numbers — from profit margins and debt to money in the bank — you need to understand the environment in which a company operates." So valuators supplement the company's data with information about competitors, pricing strategies, barriers to entry, expected demand, product life cycles and development costs.
Assessing and increasing value
Business valuators also apply their experience to help private company owners identify ways to increase the value of their business. "Based on our experience with similar companies, we can share best practices to help business owners improve their long-term profitability." Deloitte practitioners often approach this exercise by introducing the firm's Enterprise Value Map. "After we have helped companies establish their value, the map works as a visual tool to identify ways for them to increase that value," says Harder.
Family businesses have special needs
Family businesses are as unique as the families that have created them, and require special attention to personal relationships and dynamics. "With family-owned businesses, emotions can run high, because what's at stake is maintaining and preserving family assets," explains Terry Noble, national leader of Private Company Services. "This is why business owners often turn to outside advisors. We provide professional objectivity, which allows us to assess a company's value without bias."