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Valuation Discount

Definition - What does Valuation Discount mean?

A valuation discount refers to the deficiency in value that a buyer estimates for a company compared to its peers in the same industry. Buyers will typically review comparable transactions as part of their due diligence prior to completing an acquisition. This review provides a range of multiples that is being applied to most transactions. If the buyer is willing to pay below or at the low end of this range, it means the target company has unfavorable attributes to justify a valuation discount.

Divestopedia explains Valuation Discount

Buyers calculate valuation discounts for many reasons. Some of the more common reasons are:

  • The company primarily competes on price and does not have any specific barriers to entry that would keep additional competitors from entering the market;
  • The company has consistently delivered lower margins than its competitors, and has earned lower returns on investment that its peer group;
  • The company has technology that is easy to replicate or has not been patented, making it simple for competitors to access and/or improve on it;
  • The company does not fit well with the buyer, either because its services don't open up new market opportunities, or because the management team's philosophy is directly opposed with that of the buyer's;
  • Lack of depth in the management team or excessive reliance on the relationships of the owner to generate sales; and
  • The company does not bring access to new customers or markets, meaning the buyer has little opportunity to leverage the acquisition to cross-sell services or goods.

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Resources

  • Equicapita: Equicapita
    Equicapita's model is to acquire established, private small and medium sized enterprises (“SMEs”) located primarily in Western Canada.
  • Evolution Capital: Evolution Capital
    Leaders in growing small business.