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Valuing Privately Owned Companies: Valuation Techniques – Technical Note
By John Mullins, Robert M Johnson, Steve Pesenti
It is commonly said that the valuation of companies is more of an art than a science. The essence of this statement is that arriving at a valuation is a matter of judgment, balancing the consideration of various factors, rather than the mechanical application of a mathematical formula. This is especially true when trying to value an unquoted (privately-owned) company. However, this does not mean that valuation is a purely subjective exercise, where different figures arrived at by different routes may be regarded as equally valid.
From the valuer’s perspective, some approaches may clearly be a better guide to value than others in specific situations. The skill of valuation lies in assessing the relative appropriateness of differing valuation benchmarks to a particular situation.
The purpose of this note is to provide a perspective on commonly used valuation techniques by discussing their relative advantages, limitations and pitfalls. It begins with a review of pertinent financial theory and then moves on to discuss the application of various valuation methods. The reader should be left with a better understanding of the basic techniques and how to apply them in a particular situation.
|Publication Date:||February 2021|
|LBS Case Code:||TCN-21-002|
|Subjects:||Accounting valuations, Finance, Forecasting methods, Valuation methodology|