Business valuation starts with qualitative analysis

By Joy van der Veer | September 19, 2019 | 2 min read

In today’s ever-changing world, a realistic business valuation depends on more than just a quantitative analysis. More and more business valuation analysts are realizing that the way companies present themselves on the market can have a major impact on their future financial health, making it an important factor to consider during the business valuation process. For this reason, business valuation analysts are increasingly carrying out qualitative analyses before they start crunching any numbers.

The importance of a corporate narrative

What sets the company being valued apart from other, similar enterprises? How long will they keep this competitive edge? What is their current business model? What will their business model be in five years’ time? How will the evolution of their business model affect the company's results, and which investments are necessary? By taking the answers to these questions and using qualitative analysis to translate them into a financial projection, business valuation analysts can make the “crystal ball” into which they gaze a lot clearer.

Fade rate analysis

The rise of qualitative analysis in business valuation has led to a new, more refined valuation technique: fade rate analysis. Using the answers to the above questions, a fade rate analysis predicts how profitable a company’s business model will be today, tomorrow and in the long term. If the projected return is higher than the required rate of return, business valuation analysts must determine how long the company can maintain this advantage over its competitors and what will be necessary in order for them to do so.

From qualitative analysis to business modeling

Greater awareness of the importance of combining qualitative and quantitative analysis in business valuation has led analysts to take a much closer look at business modeling. If the subject of a business valuation lacks a clear business model, they will need to develop one before valuation can proceed. They can begin by examining their existing business strategies and elaborating on them using a tool such as the Business Model Canvas. Business valuation analysts also often use the Business Model Canvas as a convenient framework during talks with management about their company’s five-year business plan.

Using the Business Model Canvas as a starting point

While the Business Model Canvas has been around for some time, it remains popular because it is clear, coherent, widely applicable and easy to understand — you don’t have to be an economist to use it. It’s also an excellent tool for generating data for analysis. For business valuation analysts, it serves as a logical starting point for analyzing a company’s business model and revenue generation strategies. The resulting qualitative data can then be converted into quantitative data and used to construct a financial projection. This projection forms the basis for assessing the value of the business in question.

New methodology

The growing prominence of qualitative analysis is rapidly changing the way that business valuation analysts work. Rather than diving straight into the financial side of things, today’s business valuation analysts begin by analyzing a company’s business plan and strategy. To do so effectively requires certain skills, such as the ability to build a solid business plan, to communicate effectively with management at the company being valued, and to translate qualitative analysis into usable data.

Are you ready to integrate qualitative analysis into your business valuation work?

Our part-time Master of Business Valuation capitalizes on the rise of qualitative analysis for business valuation with a module on Strategy and Innovation. The topic of qualitative analysis will be discussed in depth throughout the module. In addition, students will practice translating from qualitative to quantitative models under the supervision of an experienced business valuation analyst during the second of three peer-review workshops.