There are two main approaches to valuation, which are as follows:
- Relative approach: In this approach, you have the following methods:
- The comparative company method of valuation: This method obtains the value of a business by looking at the value of similar businesses and their trading multiples, the most common of which is enterprise value (EV) and earnings before interest, tax, depreciation, and amortization (EBITDA), where EV is divided by EBITDA.
- The precedent transaction method: Here, you compare the business to other similar businesses in the industry that have recently been sold or acquired. Again, you can use multiples to derive a value for your business or company.
- Absolute approach: This approach estimates all future free cash flow of the company and discounts it back to today. It is called the discounted cash flow (DCF) method. Essentially, the approach...