Valuation of businesses and companies

Valuation of companies is a very broad field that deals with valuations for different purposes using different methods and approaches.
We can assist you with a valuation of businesses in any industry and of any size from a small 'one-man show' firm to a company that employs hundreds of employees.

The most important thing is knowing the business that must be valued, understanding the environments in which it operates, exposure to risks, and the ability to take advantage of opportunities to grow, in other words, behind each comment is a story that is unique to the company that must be translated into an economic valuation.
Therefore, the preparation of the valuation requires a deep understanding of the field of valuations, experience, and in-depth knowledge of the industry in which the company operates.

Business valuation is relevant to many cases, including: ​

• Selling/buying a company

• Splitting/merging companies

• Adding/disconnecting partners

• Registering the value of the company in income tax

• Divorce process between the couple

• Request for bank or non-bank credit

Valuation Methods

There are various methods for preparing a valuation, some of them are simpler and are based on various estimates that are usually derived from the financial statements while referring to industry data and some of them are more complex and rely on the preparation of a multi-year forecast of expected cash flows discounted to present value.
 

Discounted cash flow (DCF) method

The most common and accepted method for carrying out valuations is intended for companies that have a proven historical activity cycle, therefore, the method deals with projecting the future cash flows.

This method is based on the assumption that a combination of the historical payment flow of income and expenses together with an expression of the future expectation (which is done together with the owner), allows to estimate FCF (free cash flow), which is the money a company has left over after paying its operating expenses (OpEx) and capital expenditures (CapEx).

Major importance must be given to the discount rate through which the free cash flow is capitalized, which must express the level of risk of the business.
Usually, the discount interest rate will consist of the following components:

• risk-free interest

• a risk premium that will express various aspects such as the size of the company, whether it depends on a single person in the company or a balanced management company, country of operations, risk profile of the industry, etc.

• the level of certainty regarding the forecasted cash flows.

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The multiplier method

This is the easiest and most intuitive method. However, using this method requires a comparison with industry data of companies that operate in the same field, so if the business is part of a certain niche or there is difficulty in finding relevant public information about companies of a specific industry in which the company operates, hence it might be difficult to find reliable multipliers for this method.

According to the multiplier approach, the value of the company is determined by multiplying its projected maintainable earnings by a relevant multiplier. This approach is designed to provide a reasonable estimate and is often used in combination with DCF method in order to develop a range of reasonable fair values.

The asset value method

The asset value method is the method based on the analysis of the findings of the company's financial report.

It's based on the analysis of the assets and liabilities of the company and the strength of its financial position.

Financial position as of a certain date indicates the current state of a company while ignoring future operations and potential, therefore this method is mainly suitable for valuing companies that have going concern issues.

The property value method may also be suitable for companies dealing in real estate.
 

The choice of the right method depends on the nature of the company's activity, the purposes of a valuation exercise, the stage of the company’s lifecycle, and other additional factors.

The method according to which the valuation is performed will affect the result.
In addition, different professionals may arrive at different results following the use of different basic assumptions for performing the valuation, whose influence on the valuation result can lead to a gap of tens of percent, therefore, sometimes, several methods are used and the determined values are used to determine a range of reasonable fair values.

Therefore, we advocate a method according to which there is complete transparency with the client so that each key assumption in the model is clear and detailed in the opinion when the sensitivity of key assumptions in the model is tested (future growth, future change in selling expenses / administrative and general expenses / other significant expense components) In order to understand the effect of these assumptions on the valuation results.