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How to understand company valuation

Dawid STOLAREK
Corporate Finance Manager at RSM Poland

Company valuation is a topic most managers and owners are likely to face at some point in running their large-sized businesses. The study is usually elaborated in connection with a prospective company acquisition/sale transaction, allotment of an organised part of the company into the structures of a new entity, or in relation to conditions imposed by regulations on financial review. These are, of course, only some examples – the list of circumstances that require or simply contribute to preparing a professional company valuation is much longer.

Different advisor, different valuation result

Very often the task of company valuation is outsourced to a consulting company. As a result of the agreement concluded with advisors, you are provided with a valuation report that usually comes down to establishing the value of the company in the form of either a specific, single amount or possible price range. Valuation of the same company, when assigned to several advisory firms at the same time (even considering they all have access to the same knowledge and information), will almost certainly vary to a greater or lesser extent. How is such a situation to be understood? Has one of the valuating advisors made a mistake?

Not necessarily. Company valuation is only an estimate. Or, to use the language of statistics, an estimator. By applying a certain calculation procedure, based on the chosen valuation method and following an analysis of the current state and the company’s outlook, we come at an amount or price range that is only an estimate of the actual, hidden value of the studied business entity.

Golden rules of valuation

This, in turn, raises the question whether the results obtained thanks to the conducted analysis may be applied when making investment decisions or undertaking other actions that typically require company valuation.

The answer is, of course, yes. However, certain rules need to be followed in order to obtain a credible, almost perfect value. Most of all:

  • The methods and techniques used in the process of valuation should suit the company's characteristics and the aim of the estimation;
  • All performed calculations must comply with the methodological requirements of contemporary corporate finance and be free of errors;
  • The studied material should include only reliable company information and data that is realistic and fits market expectations, to allow for a credible assessment of the company's value.