There is no single universal valuation method that provides an appropriate value in every case as each target has unique characteristics that need to be considered. In practice it is usually better to apply several different techniques and then compare the results as this will usually reveal the factors which are adding or destroying value. In addition to valuing a target on a stand alone basis it is also necessary to consider how much the target will be worth to the acquirer as a whole after the transaction is completed. Since most M&A transactions are expected to deliver synergies, a discounted cash flow method is often used as it takes into account future benefits to the acquirer. However, this valuation method would normally be supplemented with other valuation techniques to obtain an appropriate range of values for the target company. Other valuation techniques utilised may include an analysis of comparable transactions in a similar industry to obtain earnings or revenue multiples, an asset valuation focussed on replacement cost or perhaps a Greenfield analysis which would assess the cost to start from scratch a business similar to the target. The actual price paid for the target business is often a function of the negotiating skill of the acquirer and the perceived risks and rewards of the investment which varies significantly for each potential investor.
 
A key focus of financial due diligence, for the buyer and by implication the seller, is to identify issues which will have a direct impact on the valuation drivers and therefore, the valuation of the target company. For example, if the pricing agreed with the seller is based on a discounted cash flow model, then the financial due diligence should assess the assumptions used in the target's projected cash flows and identify key risk areas and appropriate adjustments in light of historical performance. Alternatively, if the pricing is to be determined using an earnings multiple, then the financial due diligence should seek to identify adjustments to the target's reported earnings to arrive at sustainable earnings against which the earnings multiple would be applied. In both examples, financial due diligence seeks to validate the underlying valuation assumptions of the target and therefore has a direct impact on the valuation.

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