The business pages are regularly filled with stories about corporate acquisitions, sales and investments, and sometimes the figures associated with those transactions can seem astronomical.
Why, earlier this year, did tech giant Cisco pay $125m (£92m) for artificial intelligence start-up MindMeld? And how has Amazon arrived at a point where it was prepared to pay a whopping $13.7bn (£10.1bn) for grocery chain Whole Foods?
These are big deals, global in the case of Amazon, between huge companies and their shareholders. But the metrics used to work out how valuable a company is applies at all levels.
So, what is it that makes a company valuable? The measure of a successful business can be found in its P&L account, of course, but there are other factors too. How important, for example, are reputation and image compared with the organisation's balance sheet and the underlying fundamentals of the business?
In a fast changing economy, is a company's place in its market, its ability to adapt to change and its future potential, just as valuable as its accounts?
To get a clear answer to these questions we have to look at how investors, analysts and corporate financiers arrive at valuations.
Clearly, financials are important when arriving at a proposed value of the business. But so is future potential.
Any investor or buyer will typically be buying into the future growth potential of the company and its ability to create further value, therefore this will have a bearing on the price they are willing to pay.
Other factors that can potentially impact value include the following:
• Is the business capable of delivering its growth potential?
• Is there a team in place with the right skills and bandwidth?
• Is there capacity in the existing facilities? Are the right systems in place?
• How competitive is the environment the business is operating in and how does the business articulate its points of differentiation? The company's USP is key.
Showing evidence that the business is run in a professional manner and is "clean" can really help with buyer confidence and can avoid downward price pressure. Things that can help evidence this include having a clean balance sheet with normal debtor and creditor days; having regular board and management meetings to discuss and challenge business performance and strategy; KPI monitoring; appropriate reporting processes and maintaining all records in a clean and logical fashion.
From a seller's point of view, when deciding on what party to go with, clearly valuation will be a major factor - however, it is not always solely about this.
Often of equal importance is the nature of the buyer or investor, as well as the structure of any deal.
For example, when I speak to companies seeking investment, factors such as retaining control, the relationship fit with an investor, and value-add the investor can bring beyond money, will often be key considerations for the shareholders and management. At BGF, we recognise the importance of these factors, hence why we aim to take the role of a minority funding partner for the business providing long term capital as well as access to a broad network of relevant experience.
Ultimately, in my opinion, there is no strict methodology as to how investors or buyers arrive at valuations.
The financials of the business, as well as a lot of the points highlighted above, will have an impact, as will the pricing of transactions in similar sectors or markets.
However, it will come down to a discussion, or negotiation, between buyer and seller in order to see if there can be a meeting of minds on the price as well as the structure of any deal.