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Companies looking to acquire, divest, expand geographically or by product
need to understand the value of such strategic initiatives.
Valuations start with an understanding of historical and pro forma financial
performance. Due diligence is a necessary component of understanding the
validity of the past as a determiner of future results.
Components that impact valuation include historical and estimated revenues and
expenses, of course. Key additional considerations also include likely capital
expenditures required as well as ongoing development costs that may not have
existed during the past years. It is not unusual for those costs to be
 deferred
by a seller as a measure to accrue cash and improve company value, only to leave
the acquiring entity with substantial unexpected costs.
The level of competition in a market, as well as the likely regulatory or
technology changes that may destroy or limit the market advantages that a seller
currently possesses are key valuation considerations. Reliance on a small
customer base for revenues and cash flow are likely to negatively impact overall
value. A company that relies on a single customer for a larger percentage of
revenues must be able to support their ability to find new customers.
All of these issues need to be understood through an appropriate due diligence
process. Additionally, as a transaction is being structured, various protections
can be established for both the buyer and seller that will help support a deal
when the valuation of a company is subject to any or all of these risk
components.
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