Critical aspects of a company valuation

In order to achieve a good and realistic valuation, there are certain critical aspects of a company valuation that need to be treated with great care.

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Fundamental aspects to assess

First and foremost, it is important to know that the valuation is a dynamic process, in which different hypotheses are made and as more information is obtained or the company or industry is better known, adjustments must be made.

Any change that may affect the company or the sector must be included. In other words, when making models, you should start with drafts and improve them until you get very realistic models.

Having explained this, the following sections should be emphasized:

What are the critical aspects of a company valuation?

A) Involvement of the company

The company must be a participant in the process. It should not be a mere spectator that only offers the annual accounts, it should help to offer its vision of the sector, of the company and collaborate at all times to identify those crucial aspects of the company that only they know.

B) Multifunctional

In the process of valuation should not only involve financial management. The managers of the different departments must enrich the process with the know-how of the department to which they belong.

In this way, it is possible to have a real image of what is happening in each department and how they may operate in the future.

C) Strategic

The estimation of cash flows must be carried out should be done taking into account the strategy of the company to be valued. It cannot focus solely on an analysis of the sector, but this analysis should serve as a benchmark to see if these objectives or strategies are viable and to look for possible reliability problems.

D) Remuneration

Executive compensation must be linked to the achievement of objectives. set out in the projection, in terms of sales, growth, market share, etc., so that the strategic objectives are aligned with the remunerations to promote their achievement.

E) Historical analysis

The following must be performed a historical analysis of forecasts and actual situations, by focusing on the cause of the deviations produced, seeing how the company's competitive strategy has worked and assessing the consistency of the forecasts.

F) Technically correct

The technique applied in the valuations must be correct, which means that great care must be taken when performing:

• Flow calculations.
• The appropriate treatment of risk in the WACC.
• Consistency of flows and rates used.
• Calculation of residual value.
• Treatment of inflation.

Since once the financial projections have been made, these are the most relevant points, great care must be taken, since a small variation in these projections could result in a significant reduction of the financial projections. can have a major impact on the final evaluation.

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