Company Valuation Methods and How to Choose the Right One

In our previous article we looked at how the figures in the financial statements and the commercial structure of a business come together in a valuation. Choosing the method is the continuation of that review. How the company earns its money, which assets it rests on, and how reliably the next few years can be forecast largely determine which method is used.

DCF, market multiples, net asset value and the venture capital method are listed side by side almost everywhere. Each measures a different side of the company. In a business with steady production and an order history, future cash flow comes to the fore; in a holding company, the current value of subsidiaries and property is more decisive. In an early-stage venture the conversation is less about current profit than about the scale the company can reach and the investor’s exit scenario.

The International Valuation Standards group the methods under the income, market and cost approaches. DCF is the most widely used application of the income approach, comparable company and transaction multiples of the market approach, and net asset value of asset-based work. In most valuations one of these forms the primary method while the others are brought in to check the result.

Choosing the Valuation Method

We begin by clarifying why the valuation is being prepared and exactly what is being valued. A company sale, bringing in a new shareholder, financial reporting or an investment decision may draw on the same information set but require a different frame. Where a minority stake rather than the whole company is being valued, the voting, dividend, governance and liquidity rights attached to that stake enter the work as well.

We then look at how the business actually works. The split of revenue by customer, the contracts, capacity, pricing, the supply structure and how quickly profit converts into cash all matter here. In a company whose growth requires new machinery, high inventory or long collection periods, revenue and EBITDA forecasts alone do not give a complete picture. Capital expenditure and working capital belong in the same plan.

The management budget works as raw material at this stage. A budget supported by sales volume, price, capacity, headcount and an investment plan can provide a strong basis for a DCF. Where the forecasts have only just been prepared or the trading history is short, completed transactions, comparable companies and recent funding rounds carry more weight.

Sector dynamics change the method too. In banks, where debt is part of the operating model, return on equity, capital adequacy and distributable dividends are more meaningful indicators. In energy and mining projects, reserves or asset life, the production plan and project-level cash flow come to the fore. In groups operating across several areas, each business line may need to be valued within its own structure.

Discounted Cash Flow (DCF)

The discounted cash flow (DCF) method arrives at company value by discounting the free cash flows the business will generate in the future to present value using the weighted average cost of capital (WACC).

In companies with an established trading history we usually run DCF and multiple analysis together. DCF starts from the company’s own plan, multiples from the value the market attributes to comparable companies and transactions. Because the same company is being viewed from two different places, the gap between the results carries information of its own.

In the DCF model we forecast the free cash flows the company will generate over a defined period and bring them to present value. Most of the work sits before the discounting. Revenue growth needs to be explained through sales volume, price, capacity and customer acquisition, and margins supported by raw material, personnel, energy and other operating costs. Once capital expenditure and working capital are added, it becomes clear how much of EBITDA actually converts into cash.

The cash flows are discounted at a WACC that reflects the company’s risk and financing structure. The risk-free rate, the market risk premium, beta, the cost of debt and the tax effect all sit inside that calculation. The result is more consistent when the model’s currency, its inflation assumption and the discount rate are built on the same basis.

The most sensitive part of the model is usually the terminal value. Representing the operations beyond the forecast period, in models built with a five-year forecast it commonly accounts for 60 to 75 per cent of total company value. For that reason it is worth showing the effect of changes in WACC and the terminal growth rate in a separate sensitivity table. Working with base, downside and upside scenarios, rather than a single case from the management plan, also shows which assumptions move the value.

Market Multiples

The market multiples method produces a value range by applying the valuation ratios of comparable listed companies and completed transactions to the company being valued.

The multiples used most often are EV/EBITDA, EV/Sales, P/E and P/B. EV/EBITDA helps compare companies with different financing structures on operating profitability. Capital expenditure and working capital requirements are then examined alongside the multiple. In companies whose profitability is still developing, EV/Sales can be more explanatory; in banks, P/B read together with return on equity.

In our experience, building the peer group takes longer than calculating the multiple. Even where the field of activity looks close, scale, geography, growth, margins and customer structure can create serious differences. The median multiple is a starting point here. How that level should be interpreted depends on the growth, liquidity and risk differences the subject company carries relative to its peers.

With precedent transactions we do not look only at the announced consideration. The percentage acquired, the form of payment, the date of the transaction and the synergies available to a strategic buyer may all sit inside the multiple. Accounting treatments such as TFRS 16 also require EBITDA and net debt to be prepared on the same basis. Otherwise the lease effect enters enterprise value in one company while remaining within operating expenses in another.

Net Asset Value

The net asset value method re-measures the company’s assets at their current values as at the valuation date and arrives at equity value by deducting total liabilities.

In a net asset value exercise the balance sheet is read again as at the valuation date. Property, plant and equipment, subsidiaries, financial investments and other rights are taken at their current values. Alongside trade and financial debt, provisions, litigation risks, deferred tax effects and obligations that may sit outside the records are also brought into account.

This approach is more visible in property holdings, investment companies and asset-heavy businesses. In energy, mining and infrastructure companies a separate value can be calculated for each project and combined at group level. Total net asset value is reached after central costs, group debt and other adjustments.

In a distribution or service company with limited fixed assets the balance sheet may show a much smaller figure. We do not use net asset value on its own in those businesses: commercial relationships, brand, people and customer continuity carry much of the operating value, and the balance sheet returns a result well below it. Net asset value shows the asset side, while DCF and market multiples complete the picture of the business as a going concern.

The Venture Capital (VC) Method

The venture capital method discounts the company’s estimated exit value in a few years’ time back to today at the investor’s target rate of return, and takes account of the dilution created by subsequent funding rounds.

In early-stage companies the work proceeds on the commercial scale expected a few years out rather than on current profit. An exit value is calculated using future revenue or EBITDA and discounted to the present at the return the investor is targeting. Pre-money and post-money values are set out alongside the dilution that later rounds will create.

The exit year, the exit multiple and the capital the company will need until that date are the most sensitive assumptions in this method. The price of the most recent funding round also provides an important reference. The IPEV Valuation Guidelines offer a framework for updating that price in later periods in line with company performance and market conditions.

Sum of the Parts (SOTP)

The sum of the parts (SOTP) method values each unit of a multi-business group separately with the method suited to its own structure, and adds the results at group level after deducting central costs and group debt.

In some companies the methods separate by business line. A holding company’s manufacturing business may be valued with DCF and multiples, its property portfolio at net asset value, and an early-stage subsidiary at its last funding round or with the VC method. The sum of the parts approach brings these different results together at group level.

Valuation methods compared

Assessing the Methods Together

Where more than one method is used, placing the results side by side is only the first part of the job. If DCF returns 100 and market multiples 70, we look at where the difference comes from. Do the management forecasts assume growth above the market, are the margins of the comparable companies lower, or is net debt classified differently? That examination also determines the weight each method carries.

In a company with a strong order book and a traceable investment plan, DCF can carry more weight. In a specialised sector with few comparable companies, multiple analysis may remain at the level of a cross-check. Where assets make up a substantial part of company value, net asset value can support the main result. The reported value range emerges at the end of these judgements.

At the final stage we move from company value to the value of the shareholders’ interest. Net financial debt, excess cash, shareholder receivables and payables, non-operating assets and debt-like items are taken into account here. In company sales the normal level of working capital can also affect the purchase price.

The transaction price is then shaped by the payment schedule, deferred consideration, earn-outs, seller financing, the percentage acquired and synergies specific to the buyer. This is one of the reasons different prices are discussed for the same company. The parties negotiate not only the present economic value of the business but also when and on what conditions payment will be made.

A good report shows not only the figure reached but the assumptions under which that figure would change. How far does the loss of a major customer, an investment brought forward or an increase in WACC move the value? In valuation discussions this is the section people return to most.

Frequently asked questions

Which valuation method gives the most accurate result?

No single method gives the right answer on its own. DCF, market multiples and net asset value measure different sides of a company. In any engagement one becomes the primary method and the others check the result. Which one leads is determined by how the company generates cash, its asset structure and how well grounded its forecasts are.

Should I use DCF or multiple analysis?

In companies with an established trading history and a budget supported by sales volume, price and capacity planning, DCF is the primary method. In sectors with plenty of comparable listed companies or transactions, multiple analysis comes to the fore. The gap between the two results is itself informative: we examine whether it comes from the growth assumption, a margin difference or the classification of net debt.

What is the difference between enterprise value and equity value?

Enterprise value is calculated on a cash-free, debt-free basis. Moving to equity value, we take account of net financial debt, excess cash, shareholder receivables and payables, non-operating assets and debt-like items. Because of this bridge, the enterprise value discussed in negotiations and the amount paid to the shareholder differ.

How is a minority stake valued?

We first establish the value of the company as a whole, then look at the rights attached to the stake. Voting rights, dividend policy, board representation and the transferability of the shares all affect value directly. Where a holding carries no control and cannot easily be converted into cash, minority and marketability discounts come into play.

How is a loss-making company valued?

A loss does not rule out a valuation. We first ask whether it is temporary or structural. Where it stems from one-off costs, an investment not yet in service or non-operating items, the work can proceed on a normalised EBITDA. In growth companies where profitability has not yet emerged EV/Sales comes forward, and in asset-heavy structures net asset value. Where the loss is structural, value is usually capped by the net realisable value of the assets.

How is terminal value calculated in a DCF?

There are two common routes. Under the perpetual growth (Gordon) method, the normalised cash flow beyond the forecast period is divided by the difference between WACC and the terminal growth rate. Under the exit multiple method, a reasonable sector EV/EBITDA multiple is applied to the final forecast year’s EBITDA. Running both is useful: it shows whether the multiple implied by the terminal growth rate is realistic.

How is WACC calculated?

WACC is the average of the cost of equity and the after-tax cost of debt, weighted by their share in the capital structure. The cost of equity is built from the risk-free rate, beta and the market risk premium; in emerging markets a country risk premium is added. Consistency is the critical point: the currency, the inflation assumption and the discount rate must rest on the same basis. Discounting a local-currency cash flow at a dollar-based rate distorts the result.

What is the holding company discount, and why is it applied to a SOTP result?

Sum of the parts adds up the values of the individual businesses, yet the market often prices a multi-business group below that total. Central costs, capital that cannot move freely between the businesses, limited transparency and the shareholder’s inability to access the parts directly all create the gap. The reduction applied to the SOTP result is called the holding company discount; its size depends on the structure of the group and whether it is listed.

What should be considered when valuing a family business?

Normalising the financial statements is decisive here. Director remuneration above or below market levels, personal expenses carried by the company, related-party transactions priced off market and shareholder current accounts are all separated out. Non-operating property and idle assets are treated apart from the operating business. Customer relationships tied to the founder and dependence on key people are then assessed on the risk side.

Which standards govern a company valuation?

The International Valuation Standards (IVS) frame valuation under the income, market and cost approaches, and require the basis of value, the valuation date and the scope of the engagement to be defined clearly in the report. For venture capital and private equity portfolios the IPEV Valuation Guidelines are used. In Türkiye, valuations prepared for capital markets transactions are also subject to the relevant Capital Markets Board regulations.

Are valuation and price the same thing?

No. A valuation produces a defensible range for the economic value of a business at a given date. Price is the outcome of a negotiation. The payment schedule, deferred consideration, earn-outs, seller financing, the percentage transferred and synergies specific to the buyer can carry the price above or below the valuation range. That is why different buyers discuss different prices for the same company.

If you would like to see which approach fits your company and what value range is defensible, we carry out an initial assessment as part of our business valuation service.

Author: Taha Berk Deke, M&A Analyst – Anatrica Partners Global Danışmanlık A.Ş.
Last updated: 15 September 2026

This article is for general information only and is not a substitute for investment, legal or tax advice. Company value varies with company-specific data and assumptions.