Reminder on Common Valuation Techniques

The purpose of this chapter is to introduce the two most widely used asset valuation methods, which comprise the discounted cash flow (DCF) approach and the valuation approach based on multiples (relative approach). The reader will be provided with the main steps of the valuation process and some common tools and techniques, enabling them to carry out their own valuations. This chapter is intended to be a practical guide and therefore, only goes into the theory to a limited extent. However, the main concepts underlying the valuation will be discussed: After a brief definition of the company’s value and its sharing among the different stakeholders, a few accounting reminders will permit an understanding of how a company generates profits and cash flows. The focus will then be placed on the cost of capital from both a theoretical and practical perspective. Finally, the last two sections cover the implementation of the DCF and relative approaches, illustrated with concrete examples. The tools, guidelines, and caveats given in this chapter are based on several years of practical experience advising corporates and funds on their mergers, acquisitions, and divestitures (M&A).