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Company Valuation

Capstone’s approach to company valuation is multi-dimensional: we combine proprietary analytical tools with our deep experience of M&A transactions across a broad range of companies and industries.

Valuation is as much art as science, requiring the exercise of good judgment combined with a systematic analysis of the data. That’s why experience is such an essential ingredient of the process. There are many ways to calculate a company’s financial value, and none of them are perfect. All methods require trade-offs, which must be balanced with the strategic objectives driving the deal. Capstone’s solution is to adopt multiple perspectives, while exercising patient and thorough analysis to deliver reliable results.

Our valuation advisors bring over nineteen years of experience to the table and are well versed in sophisticated and complex valuation methodologies. Capstone’s services include valuation for acquisitions, divestitures, strategic planning and any circumstance where it is important to achieve a reliable measure of a company’s value.

Valuation Essentials

Here is a brief summary of the principles that guide our valuation process:

  • Valuation is inherently imprecise. Consider a range of values rather than a single “correct” value.
  • Do not confuse value and price.
  • Look to the future, not the past. History is relevant only as a partial guide to the future.
  • Working backwards can be a valuable exercise. Ask yourself what you have to believe about a set of projections to justify a certain value.
  • Valuation is more than a numbers game. You cannot appropriately value a company without a thorough understanding of the business and its environment.
  • A company may have different values to different buyers because of the unique synergies the acquisition may offer in each case.

What Drives Value?

Ultimately, value lies in the eye of the beholder — or to be precise, in the eye of the buyer on the one hand, and of the seller on the other. Multiple factors determine how value is perceived.

Here is a summary overview (click for a larger view):

A Choice of Methods

There are many widely accepted techniques for arriving at a company valuation. At Capstone, we do not believe in one “right” method. We draw on all or any of these approaches in the combination that is most appropriate for the specific transaction:

  • Discounted Cash Flow – Future cash flows discounted to present-day value
  • Book Value – Cost of assets, less depreciation
  • Capitalization Rate – NOI divided by price
  • Liquidation Value – Amount for which an asset could be quickly sold or divested
  • Replacement Cost – Amount of money to replace an asset
  • Current Market Value – # of shares outstanding x current share price
  • Market Comps – Trading values of similar companies

Different valuation methodologies result in calculating different values for the same company. The chart below illustrates an example of this concept (click for a larger view).

There is no one right method that is best suited for every situation. Understanding your goals and strategy is an important part of selecting the most appropriate valuation method.

A Disciplined Process

Valuation is a combination of art and science, but that does not mean it should lack discipline. Capstone applies a step-by-step process that is summarized in this chart (click for a larger view):

Benefit from our experience. Adopt the Capstone Roadmap to Acquisitions℠.

  • Phase I: Build the Foundation

    Take your bearings, conduct a reality check on your current business situation, and establish a viable strategy for growth.

    Know your CORE competency. Consider your business culture and how to share risk tolerance with a potential acquisition.

    DEFINE your growth strategy. Consider acquisitions in the context of your strategic growth plan.

    Have ONE reason to purchase a company. More than one reason leads to unclear decision making.

    Acquisition is a COLLABORATIVE effort. Build a multi-functional Team from the ranks of your company and outside experts.

    DEFINE the market in which you will conduct research and ensure a stable demand for products and services.

  • Phase II: Build the Relationship

    Research prospective partners, make initial overtures, and develop a dialogue of trust. Every company is for sale.

    Conduct company searches using a STRUCTURED process and OBJECTIVE tools. Integration planning begins now.

    Now arrives a critical moment in the ROADMAP process. It is time for your Team to apply their exhaustive planning and research.

    Building TRUST between the buyer and seller and early face-to-face meetings are critical, as well as, rich in opportunities and insights.

    Determine the strategic fit and ONE reason objective of the prospect and calculate the company's financial worth.

    Stay FOCUSED on your desired strategic outcome while considering the seller's corporate and personal priorities.

  • Phase III: Build the Deal

    Compile the nitty-gritty of due diligence, deal structure, closing the transaction and integrating the entities.

    ESTABLISH the non-binding elements of the acquisition and provide a pre-LOI to address any miscommunications or misunderstandings.

    This should CONFIRM your research rather than inform, and CONFIRM your criteria-driven image of the prospective company for purchase.

    ESTABLISHES in a written document the Legal Structure, Financials and other important issues to support the purchase of the company.

    EXECUTION of the elements of integration will reflect your strategic choice to plan for and purchase the right company.