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Corporate Valuation by Laura Zanetti, Gianfranco Gianfrate, Mario Massari

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Chapter 5Determining Cash Flows for Company Valuation

5.1 INTRODUCTION

As discussed in the previous chapters, valuing a company, an acquisition, or, more generally, any business investment requires some preliminary analysis in order to understand the business model under consideration and its potential growth. The next step considers the reorganization of the financial statement data and business plan figures to facilitate the application of the valuation methods hereafter discussed.

To this end, it is essential to recall the possibility to evaluate a company as a whole or as a sum of parts—that is, by evaluating the different business units the firm is composed of.

In particular, the sum-of-parts approach is more suitable when:

  • The company operates in two or more business areas characterized by different underlying levels of uncertainty.
  • The growth prospects differ significantly across the company's business units.

The need for separate valuations of the different business areas may arise also when the buyer, after the acquisition of control, is willing to spin off or sell some specific business units.

Management accounting provides the most important source of information to reorganize the company's data by business area. As a matter of fact, determining each business area's economic results is not enough: it is crucial to be able to account for each business's operating assets and liabilities. Such an operation can be particularly challenging whenever assets are common ...

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