Companies in different industry sectors often bear little resemblance to each other. Consider a professional advisory firm and a sporting equipment retailer. So does business valuation by industry follow different rules?
The short answer is no. Business valuation methods remain the same regardless of the industry your company operates in. You need to estimate the company’s risk and assess its earning capacity in order to put a value number on it.
But there is a catch. Industry sectors are associated with different levels of risk. As a result, the key input parameters such as discount and cap rates will differ depending on the industry. In formal terms, there is an element called industry specific risk and it gets added to the discount rate of every company that operates in a given industry sector.
Another key metric where the industry effect pops up is the valuation multiples. These are derived from the market and captures the values investors put on companies in a given industry. Valuation multiples involve market comparison to similar companies. So if companies in your industry face additional risks as a group so will your company.
The mechanics of each valuation method do not depend on which industry you focus on. For example, the discounted cash flow method requires that you provide the discount rate and a forecast of future earnings to run the valuation. The same applies to all the other valuation methods.
In other words, the actual calculations of business value remain the same across all industries. But the input parameters you use to crunch the numbers may well be industry sector specific.