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A DCF model forecasts all future cash inflows and outflows of the business. The net results for each forecasted year are discounted to reflect the time value of money, and these are summed to give the Net Present Value (NPV) of the company. There are several variants of the DCF methodology and some are more appropriate than others for specific businesses.
Comparables Analysis is an alternative valuation method which is based on actual market valuations rather than a theoretical value. The valuation is achieved by comparing the company to similar companies that are listed or have been sold recently and pro rating their values based on a suitable metric
Typical reasons for needing a company valuation include:
Seeking to sell a business
Seeking to buy a business
Seeking to merge with another entity
Raising finance (debt or equity)
Issuing shares or options
Wanting to understand the value drivers of a business
Typical reasons for planning include:
- rapid market growth or decline
- disruptive technology
- change in legislation
A forecast can be anywhere between 3 years and 50 years. The aim is to forecast the market for a particular product, pricing and the client's market share. Realistic forecasting is achieved by studying historical market drivers that have remained stable and projected these forwards. Forecasts are rarely 100% accurate but the aim of the exercise is that they are realistic, reasonable and defendable.
Using a market forecast as a starting point, sales volumes can be projected as well as associated variable costs. Fixed costs are then added, and tax costs can be computed from the resultant profit calculations. If required full forward looking Cash Flows, P&Ls and Balance Sheet statements can be produced with as much detail as necessary to assist management with their planning, be it sales breakdowns, cash needs, manpower needs etc.
Managers or owners need answers to a specific question or problem. For example:
Obtain highly accurate profitability data for your products, customers, territories. This is vital information for making informed strategic decisions.
These tools allow you to simulate your business under a different set of operating functions giving useful intelligence for making strategic decisions.
Over the years, companies accumulate mountains of data. The sheer scale of which makes it difficult to analyse in order to obtain actionable conclusions.