When it comes to business valuation, methods like discounted free cash flow, market multiples, or asset-based approaches are often mentioned. But before applying any of these, the most important step is to truly understand a business.
Without a comprehensive and systematic view, financial analysis or valuation modeling can become fragmented and lack context. Therefore, mastering the core factors that “decode” a business serves as the foundation of valuation.
From Legal Structure to Business Essence
A complete picture of a business begins with its legal and structural framework. The legal form—whether a limited liability company, joint stock company, or sole proprietorship—not only defines the scope of operations but also influences shareholder rights and governance mechanisms.
Equally important is identifying the company’s stage of development—from startup, growth, to maturity—allowing us to assess both its current position and future potential.
Ownership and organizational structures also play a critical role. A business involving state capital, foreign direct investment (FDI), or investment funds will face different governance constraints. Likewise, whether it operates independently or within a corporate ecosystem of subsidiaries and affiliates directly impacts its strategy and expansion capacity. These elements create the legal and organizational frameworks, which form the basis for understanding the essence of the enterprise.
Business Model – How Value Is Created
Building on this foundation, the next step is to examine the business model, which reveals how the company creates and sustains value. Beyond products or services, this involves defining the target customers, market approach, and competitive strategy.
- A company may choose cost leadership to compete on price, or differentiation to secure a sustainable advantage.
- Distribution channels—B2B, B2C, online, or traditional—shape not only cost structures but also customer experience.
- From a valuation perspective, the business model provides the basis for cash-flow forecasts, a critical element in any valuation method.
Financial Health – Measuring Inner Strength
To fully understand a business, one must also assess its financial health. Financial statements reveal whether a company generates sustainable profits, whether its leverage is within a safe range or poses risks, and whether operating cash flows are stable enough to support long-term growth.
Key indicators to watch
- ROE, ROA, and margins — effectiveness and profitability.
- Cost structure — the lever for margin improvement.
- Resilience to macro shifts (interest and exchange rates, input prices) — durability across cycles.
In other words, financial analysis bridges the gap between form and substance, showing whether the company can turn its business-model potential into reality.
Positioning within the Industry
No business operates in isolation; it exists within a specific industry and macroeconomic environment. Thus, accurate valuation requires placing the company within its industry context.
- Market size, growth, competitive structure, and market-share trends.
- Frameworks such as Porter’s Five Forces and PESTLE clarify competitive intensity and external impacts.
- These insights define the competitive position: cost leadership, differentiation, or niche focus.
This article marks the beginning of our in-depth series on business valuation, where the upcoming articles will continue to provide deeper and more practical perspectives on this field.
