Business Valuation

Description
The topic of business valuation is frequently discussed in corporate finance. Business valuation is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company. The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business.
A business valuation might include an analysis of the company's management, its capital structure, its future earnings prospects, or the market value of its assets. The tools used for valuation can vary among evaluators, businesses, and industries. Common approaches to business valuation include a review of financial statements, discounting cash flow models, and similar company comparisons.
Valuation is also important for tax reporting. The Internal Revenue Service (IRS) requires that a business is valued based on its fair market value. Some tax-related events such as the sale, purchase, or gifting of shares of a company will be taxed depending on valuation.
Investment bankers will often put together a football field chart to summarize the range of values for a business based on the different valuation methods used. Below is an example of a football field graph, which is typically included in an investment banking pitch book.
As you can see, the graph summarizes the company’s 52-week trading range (its stock price, assuming it’s public), the range of prices equity research analysts have for the stock, the range of values from comparable valuation modeling, the range from precedent transaction analysis, and finally the DCF valuation method. The orange dotted line in the middle represents the average valuation from all the methods.