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M&A and investment analysis

Valuation is at the core of all M&A activities. Transactions will only complete when seller and buyers valuation expectations are aligned. Assessing a business’s value is the starting point to a transaction whether you are a buyer or seller. A valuation of assets at an early stage of the M&A process enables may enable a buyer to understand the seller’s motivation for the transaction as well as identifying synergistic benefits, capacity constraints or excess capacity, surplus assets for disposal post acquisition and so on. Producing a robust valuation requires a detailed analysis of the business, and understanding of its key value drivers, its competitive strengths and weaknesses and the risks and opportunities it faces.

This detailed analysis is essential for:

  1. assessing the reasonableness and risks of future income streams which are the foundation of income based valuations which apply discounted cash flow techniques to restate future cash flow to present value; 
  2. identifying benchmark comparables which are the basis of valuation under the market approach where multiples such as EV/ EBITDA or EV/Turnover applied to the target’s actual or projected performance to provide an indication of business value.
Where a business is loss making valuations using the income and market approach are likely to yield negative values. In which case, it will be necessary to value the assets of the target recognising that the it may hold tangible assets such as land and property which are stated at below market value, or own valuable intangible assets such as trademarks, patents and contractual rights which are under accounting convention are either not included in its balance sheet or recorded at acquisition cost which may be substantially below market value.

There are various valuation methodologies that can be applied. A robust valuation will normally involve applying a number of different approaches. Using multiple valuation methodologies helps to triangulate value. It may be appropriate to calculate enterprise value using a weighted average of the results generated under different methodologies.

The weight attached to each method depends on the specific industry in which the target operates and its financial health. A company operating in a sector where there are comparable listed companies and numerous transactions may be more accurately valued using the market approach. Whereas the income approach may be more appropriate for a  company with steady or predictable cash flows. The valuation of a distressed company may place greater weighting on an asset based approach. When different valuation methods generate materially different enterprise values it is important to understand why and re-examine the underlying assumptions in the valuation model.

Whether valuation is an Art or Science is open to debate. The value of a company is related to the future profitability that it will generate. Future profits are uncertain. All valuations involve a degree of subjectivity, but must be supported by objective analysis. Valuation is not just a financial modelling exercise. It has to be supported by commercial insight, experience and business acumen.

Our team have extensive experience in valuing companies and assets across a broad range of industry sectors. They draw on their extensive sector knowledge derived from both consultancy and executive management experience to determine the appropriate valuation methodology to  provide well-informed, insightful, robust and transparent valuation opinions.