2.1. Valuation methods

To appraise a business, there are several methods that can be used, some arising common practice, others developed in the academy. These methods can be split into 4 types:

  1. Book-value related.
  2. Cash-flow based valuation.
  3. Market multiples.
  4. Financial instruments.

This way of aggregating methods results from the principles that are inherent to each approach. You should be aware that, although there are approaches that are more common than others, there is not one that is undeniably better than the others in every valuation situation. And also be aware of the following: market multiples and market instruments are often used more as a quick insight than as a full valuation method because of their simplicity.

Book-value are based on an historical data approach, meaning that a company is valued considering its current assets and liabilities. It does not reflect how the company may perform in the future. All other methods consider the future of the company and what gains it may bring to the equity holders. Cash-flow based methods and book-value use mostly intrinsic information of the company to undertake the assessment, whereas Market multiples and Financial instruments are more reliant on information that is external to the company.