Company Valuation
Valuation
What is business valuation?
- Three approaches: DCF, relative, and asset-based
- Sensitive to assumptions, so results are shown as a range, not a single figure
- Value is the basis for a deal; price is what negotiation produces
Once a valuation has been run, the language at the negotiation table changes. Before that, the talk goes back and forth between “We should get at least this much” and “That’s too expensive.” After the model exists, the argument is over revenue growth of what percent, a discount rate of what percent, a multiple of how many times. The fight shifts from the price to the assumptions, and that is the real effect of this work. Once both sides can see where their assumptions diverge, an emotional standoff becomes a debate over numbers that you can actually settle.
The gap between methods is wider than most people expect. In a DCF, moving the discount rate by just 1 percentage point or the perpetual growth rate by 0.5 points can swing equity value by 20–30%. In relative valuation, EV/EBITDA can land in the 5x range or the 9x range depending on which companies you put in the peer group. For tax purposes, the options themselves are different: Korea’s Inheritance and Gift Tax Act sets a supplementary valuation method that weights net earnings value and net asset value 3 to 2, so a negotiation number and a tax number exist side by side. Getting three different values for one company is not an error; each answers a different purpose.
Terminology gets mixed up often, too. A DCF produces enterprise value (EV); to get the equity value shareholders actually receive, you subtract debt and add cash. For a company with KRW 4 billion (≈ US$2,992,700) in net debt and an enterprise value of KRW 12 (≈ US$1) billion, 100% of the equity is worth KRW 8 billion (≈ US$5,985,300). The same goes for pre- and post-money valuation in fundraising: a KRW 1 billion (≈ US$748,200) investment at a KRW 10 billion (≈ US$7,481,700) post-money valuation buys a 10% stake, but at a KRW 10 billion (≈ US$7,481,700) pre-money valuation it buys 9.1%. One word in parentheses can move hundreds of millions of won.
The costliest misconception in practice is “the higher the price, the better.” If you raise funds at an inflated valuation, you have to beat that number in the next round, and if you can’t, the repricing clause kicks in and the founders’ stake is cut first. Conversely, if a share transaction between related parties is priced below the tax-law fair value, the difference is deemed a gift and taxed. A valuation report is the starting point of a negotiation, not its conclusion, and a one-page number with no assumptions table or supporting calculations will be torn down by the other side in the first sentence. Before any actual transaction, be sure to have it reviewed by accounting and tax experts.
Eunpyo HongExpert in company analysis, entrepreneurship, and startup fundraising
Sungmin JooExpert in diagnosis-based coaching leadership, entrepreneurship education, and design thinkingThe idea of discounting cash flows developed out of capital theory by Irving Fisher and others. Later, DCF, relative valuation, and asset-based approaches became the standard valuation methods in corporate finance and investment practice.
Company A makes precision machined parts, with 62 employees, annual revenue of KRW 24 (≈ US$1) billion, and operating profit of KRW 1.8 billion (≈ US$1,346,700). A co-founder who has been there since the early days holds 30% of the shares and announced retirement, so the company has to buy that stake back. The co-founder named KRW 8 (≈ US$1) billion, the CEO named KRW 4.5 (≈ US$1) billion, and talks had been stalled for three months. (Hypothetical example)
- The finance executive reworked the three-year income statements, stripping out excess CEO compensation, family salaries, and lease payments on company-owned vehicles. Adjusted EBITDA rose from KRW 1.9 billion (≈ US$1,421,500) on the books to KRW 2.6 billion (≈ US$1,945,200).
- The outside accounting firm’s CPA argued for a 12.5% discount rate, while the counterparty’s advisor argued for 10.5%. When someone pointed out, “A 2-point gap creates KRW 2.2 billion (≈ US$1,646,000) in equity value,” both sides looked at the same table for the first time.
- Applying the median EV/EBITDA of 6.2x from four comparable listed companies and a 20% private-company illiquidity discount narrowed the value of the 30% stake to between KRW 5.2 billion (≈ US$3,890,500) and KRW 6.1 billion (≈ US$4,563,800).
- When the counterparty’s representative pushed back with “Isn’t that multiple from a boom-time deal?”, the CEO led with an earn-out clause: an additional payment if operating profit over the next two years exceeds the target.
- The final agreement was KRW 5.8 (≈ US$1) billion, paid in three installments. A tax review aligned the price with the valuation under Korea’s Inheritance and Gift Tax Act in advance, eliminating any gift tax issue, and a negotiation that had stalled for three months ended with a signed contract in six weeks.