Proven Business Valuation Model Templates
It is important to note that company valuation requires judgment and assumptions:
- There are different circumstances and purposes to value a business or an asset (e.g., distressed firm, tax purposes, mergers and acquisitions, financial reporting). Such differences can lead to different valuation methods or different interpretations of the method results
- All business valuation models and methods have limitations (e.g., degree of complexity, relevance of observations, mathematical form)
- Model inputs can vary significantly because of necessary judgment and differing assumptions
Users of company valuation model outputs benefit when key information, assumptions, and limitations are disclosed to them. Then they can weigh the degree of reliability of the result and make their decision. Valuation of financial assets is done using one or more of these types of models:
- Absolute company value models that determine the present value of an asset’s expected future cash flows. These kinds of models take two general forms: multi-period models such as discounted cash flow models or single-period models such as the Gordon model. These models rely on mathematics rather than price observation.
- Relative business value models determine value based on the observation of market prices of similar assets.
- Option pricing models are used for certain types of financial assets (e.g., warrants, put options, call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black–Scholes-Merton models and lattice models.