Valuation Basics

Read a valuation critically without being a finance professional: understand what a DCF actually claims, what a multiple actually compares, how operating results connect to owner value, and which questions expose a hopeful calculation.

Standard method in finance education (DCF, cost of capital, multiples: taught in every top school's core; the authoritative practitioner reference is Koller, Goedhart & Wessels, Valuation, 8th ed., 2025). The TSR decomposition is consulting practice (BCG Value Creators, 2025). This page builds reading skill, not appraisal authority: real valuations with real stakes get a professional.

Use it when:

• A business case or budget request rests on "value created".
• You are part of an acquisition, a divestment or a buy-in, or an incentive program is tied to a valuation.
• Board material arrives with a valuation or a fairness opinion attached and you are expected to have a view.

Skip it when:

• You need the cash mechanics first (what the business actually earns and spends): use 5.3 Unit Economics Sheet and 5.4 3-Statement Snapshot.
• The value is agreed and the question is how to structure the deal: use 5.5 Deal Structure Sketch.

Valuation is unusual in this library because the method is not contested research. It is shared grammar: discounted cash flow, cost of capital and multiples, taught in every top finance core and set out in the standard practitioner reference (Koller, Goedhart & Wessels, 2025). The claim is narrow. A business is worth the free cash it will produce, discounted for risk, and a multiple packs that same claim into one number taken from similar companies.

It follows that the arithmetic is rarely where a valuation goes wrong. Disputes are about inputs: the forecast, the discount rate, what happens after the forecast years, and which companies count as comparable. So a careful reader questions assumptions, not formulas. The bridge from operating results to owner value in Step 3 is consulting practice (BCG, 2025): a way to sort the levers, used here to teach, not to forecast. Limit: this page makes you a reader of valuations, not a maker of them.

Say what is being valued, by whom, and what decision the number feeds.

Strong answer: (illustrative numbers) "Acquisition of a regional competitor, 180 MSEK, built by the seller's adviser, DCF only; feeds the board's yes or no in May." Not: "A valuation of the target."

What is being valued, and the headline value:

Who built it, and for whom:

Method used: ☐ DCF ☐ Multiples ☐ Both, and the gap between them is explained

Decision this feeds, and by when:

Illustrative example: the company and all numbers are made up.

A business area head at a Swedish building-services group receives a case for acquiring a smaller competitor: 180 MSEK, "conservative DCF".

Section 2: revenue growth jumps from a historical 3 percent to 12 percent from year one; 70 percent of the value sits in the terminal value; the comparables are three listed companies ten times the target's size, lending it their multiple.

Section 3: almost all the claimed value runs through growth, justified only by "sales synergies" that no one owns.

Section 4: the hockey stick, the terminal share and the comparables questions all land on the same few numbers.

Section 5: she asks for the one-point sensitivity and a stand-alone value without synergies. The range lands at 95 to 150 MSEK. The deal still happens, at 120 MSEK with an earn-out tied to the growth the model promised (5.5), which is what the sellers' confidence was worth in cash.