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M&A Fundamentals – The Different Methods Used to Value a Business

M&A professionals, accountants and financial analysts use three basic approaches to put a value on the businesses that are the targets of M&A transactions.  In this article we will look briefly at each of these methods of putting a value on an M&A target and how they are used.  We also provide links to further articles that look at each of these methods in depths and explore some other M&A concepts and tools that are used in putting value on an M&A target.






The concept behind an asset-based value of an M&A target is that the value of the business is what it would cost to replace its existing assets with assets of an equivalent quality.  This is balance sheet focused and static view of a business.  Asset based approaches tend to be used for low profit, or loss-making M&A targets where there is no positive income to drive a multiples or discounted cash flow approach.



The principle that lies behind am M&A multiple’s valuation is that the value of an M&A target can be derived from the stock value of an equivalent listed company, or the price paid in a precedent M&A transaction.  A ratio of some financial value, perhaps income, cash flow or revenues, to the stock price or selling price of a precedent transaction is calculated.  This ration is then applied to the target M&A company to arrive at its value.



The principle behind a discounted cash flow value of a business is that the value of an enterprise is the Present Value of the cash flow generated by an M&A target.  This is the most rigorous method of valuing an M&A target from both from an analytical and a technical perspective.  It can also be used to arrive at not just the stand-alone value of the M&A target under its existing ownership but also the strategic value of the M&A transaction when fully synergised with the M&A buyer’s own business.



Enterprise Value is one of the most important M&A concepts to understand the interrelationship between the various methods of valuing an M&A target.  Enterprise value explains how we get from the market capitalisation of a listed M&A target (share price * number of shares on the exchange) to the actual price an M&A buyer would pay in an M&A transaction.  We explore this in more detail in another article.  Whenever an M&A professional is trying to put a value on an M&A target, they must be clear if they are trying to value the market capitalisation of the M&A target or its enterprise value.



M&A professionals will typically explore multiple methods to put a value on an M&A target.  This will result in a range of values for the M&A target.  It is important to understand that none of these data points is the definitive value of the M&A target, and certainly none of them is necessarily the price that will have to be paid to complete an M&A transaction.  Price is the outcome of a complex commercial negotiation that typically occurs in an M&A transaction process after the various valuations of the M&A target have been prepared.  The M&A valuation playing field is a tool M&A professionals use to explore potential routes from the value of an M&A target to the price eventually paid at the closing of the M&A transaction.  We explore the use of the M&A Valuation Playing Field in another article.



About The Merger Training Institute

We provide practical, in-career mergers and acquisitions training for boards, executives and professionals in global corporations.

Our short, intense M&A courses are designed for executives needing to understand best M&A practice or adding new M&A responsibilities to their existing roles.

The courses are taught by tutors with hands-on M&A experience gained as part of corporate management teams. As well as being academically rigorous they are rich with case studies and real-world examples based on our tutor’s practical mergers and acquisitions experience.

Our course participants come from a wide range of industries and roles including general management, business development, strategy, marketing, finance, human resources, operations and legal.


Our Mergers and Acquisitions Training Courses

Core Mergers and Acquisitions Skills Training Course

The Core Mergers and Acquisitions Skills programme (M&A training course) is a three- day programme that teaches all the commercial and technical skills you will need to confidently lead or support a successful M&A transaction.

Our expert tutors guide you through the M&A process from strategy and deal origination to valuation, due diligence, deal structuring, contract negotiation and post-merger integration.

M&A Due Diligence Training Course

The M&A Due Diligence Training Course is a two-day programme that offering a solid grounding in the techniques used by some of the world’s most successful companies to assess risks, evaluate synergies and confirm the strategic fit of an M&A target. The course is designed specifically for executives involved in corporate M&A.

Successful Post-Merger Integration Training Course

The Successful Post-Merger Integration Training Course is a two-day programme that provides a solid grounding in the post-merger integration techniques used by some of the world’s most successful companies to deliver value from their M&A transactions.

Across the two days of the course you move from the key decisions made in the pre-deal phase, through the critical first 100 days and on to full synergy delivery. The course covers the post-merger integration issues most likely to arise in each business function and the most important business processes.

Advanced Business Valuation Training Course

The Advanced Business Valuation training course is a two-day expert level business valuation training course that teaches participants how to prepare robust business valuations in the context of a corporate M&A transaction.

Our expert tutors move you past the stage of plugging numbers into a standard spreadsheet and help you explore how risk, synergies and the quality of the target company might impact its value.


The 10 Things You Need to Get Right For Post-Merger Integration Success

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M&A Fundamentals – Calculating the Cost of Debt for the WACC Formula

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M&A Fundamentals – Using the Capital Asset Pricing Model to Calculate Cost of Equity

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