Sell-side valuations assess the fair market value of the assets or business up for sale and provide an objective assessment of the risks and rewards of the transaction for buyers. In general, these services include the preparation of marketing documents, valuation of the company, identification of and negotiation with potential buyers and the closing of the transaction. Third-party sellers are incentivised to collect a quick fee by engaging with a buyer who may not be the best fit. It is important for a company to ensure the specific sell-side services are detailed in the engagement letter.

The buy-side broadly refers to money managers (institutional investors) who raise money from investors and funnel that money across various asset classes using a variety of trading strategies. Buy-side valuations analyse a target asset or business in the context of the wider industry and market. A buy-side valuation considers the buyer’s strategic objectives, the potential benefits of an acquisition and the financing options available to the buyer.

Pre-merger valuations are conducted before a merger or acquisition to understand the fair market value of the companies involved by using valuation techniques such as discounted cash flow analysis, comparable company analysis and precedent transactions analysis. A pre-merger valuation generally involves the use of models to analyse the financial profile of a merger after the two companies are combined. It is meant to determine the buyer’s earnings per share after the merger.

Fair value is essentially an exit price (the price at which an entity expects to sell an asset or transfer a liability) and is a market-based measurement. Firms must undertake fair value assessments to demonstrate if the price for a company is reasonable compared to the overall benefits for the buyer. To ensure a firm is delivering fair value, it must locate and estimate the intangible assets. Fair value assessments are used in the preparation of financial statements, to ensure compliance with accounting standards and regulations and for M&A, tax planning or litigation support. Fair value assessments can help inform decision-making and mitigate potential risks in a transaction or dispute.

A desktop valuation uses publicly available information and comparable sales to assess the value of a company. It’s important to note that a desktop valuation does not include an inspection of a company and can be completed without leaving the “desktop.” It is not suitable if the assessor cannot reasonably determine the arrangement of a company without closer, hands-on analysis. Desktop valuations are used when time and cost constraints make it impractical to conduct a more comprehensive valuation, or when the asset is easily accessible with public data.

An indicative valuation is done without a site inspection or checking the legal tenure and is based on information provided by the client. Although indicative valuations are generally not encouraged, they have become an accepted practice. An indicative valuation, often referred to as a preliminary valuation or estimate of value, provides a quick assessment of a company’s value. It is based on available data and serves as a tool for negotiation. While cost-effective, indicative valuations are more uncertain due to their reliance on limited data. It’s important to note that indicative valuations are a guide and critical decisions depend on comprehensiveness.

Stock option valuations are important for financial reporting purposes since they are a prevalent form of equity compensation allowing staff to buy company shares at a predetermined price known as the exercise or strike price. Typically aligned with the stock’s market price during option allocation, employees can later exercise their options to capitalise on market price increases. For private firms, stock options can help incentivise, retain and motivate staff while enhancing productivity. Valuation gauges the fair value of stock options using diverse methodologies tailored to a company’s assets, operations and business goals, harmonising with financials. Common approaches include the Black-Scholes Model, Binomial Model and Monte Carlo Model.

In corporate finance, a discount rate is used to evaluate the present value of future cash flows by factoring in the time value of money. This rate represents the expected rate of return from an investment. The discount rate often aligns with a company’s Weighted Average Cost of Capital (WACC) or the investor’s anticipated hurdle rate, which considers the investment’s risk. Future cash flows are forecasted, but their unadjusted values don’t accurately determine a project’s feasibility. This is due to the decreasing value of money over time along with uncertainty. To address this, a Discounted Cash Flow (DCF) analysis creates a Net Present Value (NPV). A positive NPV indicates the present value of cash flows signifies profitable returns, while a negative NPV suggests an unwise investment.

Startup valuations determine how much money stakeholders will earn on exit. Valuation is not an exact science, particularly for start-ups which tend to have negative but growing cash flows, little financial data and often an undeveloped proof of concept. For that reason, the income approach, market approach or net assets approach are usually not helpful. Because historical information is limited and forecasts are uncertain, the valuation process must include qualitative elements such as management experience, first customers, revenue, target demographics or a minimum viable product (MVP).

Synergistic value is the added value created in a merger between two companies due to mutual benefits. Synergies can arise from economies of scale, increased market power, complementary products and shared infrastructure. Typically, these synergies come in the form of increased revenue or lower expenses. In M&A, some buyers are willing to pay a premium above the fair market value for a business as a result of cost-saving or revenue-building synergies. The primary source of synergy in an acquisition is in the presumption that the target firm controls a resource or intangible asset which becomes more valuable when combined with the buyer’s assets. Synergistic buyers are rapid and long-term growth seekers.

Distressed businesses often need help restructuring debt, performing solvency analyses and working with receivers. Beyond setting an offer price, distressed valuation experts can help identify buyers and structure deals to minimise tax consequences. There are two types of distressed asset valuations: orderly and forced. In an orderly liquidation, assets are sold piecemeal over time to maximise returns. Forced liquidation valuations assume assets will be sold quickly. Distressed businesses have a third alternative of finding a strategic buyer who’ll pay more than the fair market value under the cost approach, including competitors looking to expand or supply chain partners hoping to become more vertically integrated.