1. Why Perform Valuation
So what is valuation? Well, it's the art and science
of attributing value to an asset, investment or company.
How do we know what is a good investment and what's a bad
investment? Sometimes these are obvious. We all typically agree a house
is a better investment than a car. The house is usually an appreciating
asset, while the car is a depreciating asset.
However, it's not always that obvious. Take for example, two publicly traded
supermarket chains. How do we know which is the better investment?
We would have to review those companies' financials and think about how
they might perform in the future and invest in the one that we
think would be the better performer. Now, let's talk about why.
Why perform business valuation at all? Well, there are many reasons to value
a company. We may be buying or selling a business
or raising money, like in an initial public offering, or an IPO.
Research analysts make buy, sell, or hold investment decisions and communicate
those findings to investors. Internal decision makers and companies use
valuation to make informed decisions. While there are many other reasons
to perform a valuation as shown in the bottom row, we're going to
focus on valuing a business for investment purposes.
2. Let's practice!