Take nothing for granted. Cash forecasts might be difficult to get if the company is very young or if some of the value of the company is locked up in a way that hasn't been monetised yet, like IP for some product or service that isn't on market yet or has only recently gone to market. I can't imagine the reason why you would use 'a similar company in a different sector,' I'm not even sure that makes sense as a concept as you're not comparing like-for-like (not an expert though so I may be missing something here).Hey! I had a mock group case study exercise the other day and I came across something quite unusual in the material presented. The task was to advise the client on which company of three to acquire, and for one of the companies it was noted that accurate figures for forecasted cash flow were not available and so the figure was derived by comparing the company with a similar company in a different sector. I have three questions:
1) Am I right in understanding this as a market approach valuation?
2) Beyond noting that this is obviously less accurate (and a bit of a red flag) than other valuations which were based on figures publicly available for the respective companies, I wasn't sure what other information I could ask for- is there something that I could recommend or documents I could ask for to gain a better valuation or is the lack of publicly available figures the end of the story?
3) Why would accurate figures for forecasted cash flow not be available in the first place?
Finally, for the other two companies it was noted that we are confident in the accuracy of this valuation because "figures publicly available" were used. As above, do we just take this for granted and move ahead or is there more to unpack?
I'd really appreciate any advice since I'm just starting to gain a better insight into company valuations
In general you want to dig into the revenue sources - if future cashflow forecasts are based off of historic revenue and growth, how sustainable is that growth and how secure are the revenues? As a very basic demonstration of the latter, suppose £10mm in annual revenues. If £3mm of that are from a single client or customer which has a right to terminate its contract if the company is bought out, there is some risk here - public information likely won't flag up this extreme reliance. So among many things, a major part of DD will be digging through customer contracts to see how reliable cashflows are.
A lot more than this goes into valuations from both the legal and IB side but these are hopefully of some use in the context of your questions.
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