How to Value a Company? - Business Valuation - Certified Experts

• 2.2 Multiples

Valuation by multiples involves determining the value of a company using ratios obtained from similar companies. These ratios are derived from the value (or price) of comparable companies along with their key financial metrics, such as revenue, EBITDA, EBIT, SALES, net profit, among others. These ratios are implicit in the comparable companies and are applied to the key financial metrics of the company to be valued.

Therefore, to use this approach, it is necessary to have a significant set of companies comparable to the entity to be valued and the ratios of these comparable companies can be applied to the financial metrics of the target company, as long as its business is not affected by unusual circumstances.

The most commonly used financial multiples in this method are:

1. Enterprise value/EBITDA multiple: It is calculated by dividing the total value of the company (market capitalization plus net debt) by the EBITDA (earnings before interest, taxes, depreciation and amortization). This multiple is commonly used in mergers and acquisitions transactions.
2. Enterprise value/SALES multiple: It is obtained by dividing the total value of the company by the income. This multiple compares the total value of the company with its income level.

Once these multiples have been obtained from comparable companies, an average or range of these multiples is calculated and applied to the company being valued to estimate its value, it is important to note that this method has limitations and does not take into account It takes into account qualitative aspects of the company.

• 2.3 Balance Sheet or Net Accounting Value

The balance sheet method in company valuation is a technique that is based on the analysis of the financial statements of a company, especially its balance sheet. In this approach, it seeks to determine the value of a company by evaluating its assets, liabilities and equity. net.

For this method, all assets of the business are considered in order to calculate its value, taking into account the accounting balance, but the history or evolution that the company may have in the future is not considered. Some of the most used methods are adjusted value, actual net assets, liquidation value, substantial value and book value.

Its procedure involves the sum of all the assets of a company and the subtraction of its liabilities; In this way, the value of the company is equivalent to the value of its assets, as it is especially useful when the company has considerable assets that could be liquidated to settle its liabilities in full.

However, this approach has limitations, since it is based solely on the book value to establish the value of the company, and it does not consider the concept of the time value of money, nor other external and internal elements that affect the company or that could not be valued in books, such as intangible assets or the organizational structure, among others, which are not reflected in the accounting records.

3. Applications of Valuation Methods 

• 3.1 Discounted Cash Flows

The method of Free Cash Flow (Free Cash Flow, FCF) has several significant applications both for internal management of the company and for evaluating its attractiveness to investors. The main applications are detailed here:

Applications for the Company

Financial and Operational Management:

• Share Repurchase: Free Cash Flow to the Enterprise (FCFE) can be used to repurchase outstanding shares, which can be a strategy to increase the value of existing shares and improve profitability per share. Repurchases can also indicate confidence in the company's future performance and growth prospects.
• Debt Amortization: FCFE allows the company to reduce its debt levels by paying off financial obligations early. Debt repayment can lower interest costs and improve the company's financial strength, reducing financial risk and improving its credit profile.
• New Investments: Funds generated as free cash flow can be reinvested in the business to finance new projects, expand operations or acquire strategic assets. This reinvestment capacity is crucial for sustained growth and long-term competitiveness.
• Cash Reserve: Maintaining a cash reserve is a prudent strategy to handle unforeseen events and ensure operational liquidity. A healthy free cash flow allows the company to establish adequate reserves to face economic fluctuations or emerging situations.

Shareholder Applications

Evaluation of Return to Investors:

• Free Cash Flow to Shareholders (FCFA): This indicator represents the amount of cash available for distribution to shareholders after making all the investments necessary to maintain and expand operations. FCFA is essential for shareholders because it reflects the amount of cash that can be used to pay dividends, make share repurchases or reinvest in the company.

Valuation and Investor Attraction:

• Value Indicator: FCFA provides a clear measure of the real value that the company can offer to its shareholders. Positive and growing free cash flow is usually a sign of a financially sound company capable of generating value for its owners, which can increase the company's attractiveness to potential investors.

5. Company Valuation Process

1. Information Gathering:
   • Fixed and Current Assets: Includes tangible assets such as property, machinery, inventory and other physical assets.
   • Liabilities: The company's debts and financial obligations are evaluated.
   • Intangible Assets: Elements such as trademark, patents, copyright and technology are considered.
   • Human Resources/Legal/General Information to identify property relevant to the business
2. Cash Flow Projection:
   • The company's future ability to generate cash flow or profits is estimated. This includes projected revenues, operating costs, capital expenditures, and changes in working capital. The projection should reflect both expected long-term growth and performance influenced by internal factors (such as operational efficiency) and external factors (such as market conditions).
3. Selection of Valuation Method:
   • Discounted Cash Flow (DCF) Method: Calculates the present value of expected future cash flows, discounted at a rate that reflects the opportunity cost of capital and the associated risk. This method is useful for obtaining a valuation based on future income-generating capacity.
   • Multiples Method: Use financial multiples (such as earnings, EBITDA, or sales multiples) to compare the company to similar companies in the market. This approach is efficient for quick, comparative valuations.
   • Balance Sheet Method (Book Value or Net Book Value): Determines the value of a company based on the book value of its net assets, adjusted for liabilities. This method provides an accounting-based perspective.
   • Mixed Method or Goodwill: It combines elements of the previous methods to offer a more complete valuation, considering the goodwill or additional value related to reputation and other intangible factors.
4. Financial Model Development:
   • After conducting a preliminary financial analysis, a financial model tailored to the specific needs of the valuation is created. This model integrates the collected data and projections to provide an accurate estimate of the company's value.
5. Interpretation of Results:
   • The results obtained from the financial model are analyzed to establish the projected value of the company. This interpretation must be consistent with the standards and criteria of financial valuation, and take into account the results of the different methodologies applied.

6. Where to get a business valuation done?

Valuing a business is a specialized process that requires technical and financial expertise. There are several options for performing this task, depending on the complexity of the business and the purpose of the valuation. Here are the main alternatives:

Consulting and Valuation Firms

• Financial and Management Consultants:
  • Services: They offer business valuations as part of their financial and management consultancies. These firms have experience in carrying out complex valuations and provide detailed analysis.
• Specialized valuation firms:
  • Services: They specialize in business valuation and detailed analysis of cash flows, assets, and risks. Their approach is in-depth and tailored to specific valuation needs.

Investment Banks

• Services: They perform valuations in the context of mergers and acquisitions, initial public offerings (IPOs), and other financial transactions. Investment banks have specialized teams that analyze companies in detail for significant transactions.

Certified Public Accountants (CPAs) and Accounting Firms

• Services: CPAs with valuation experience may perform valuation analyses as part of their accounting and auditing services. They are useful for valuations that require a detailed review of financial statements.

Independent Consultants and Financial Advisors

• Services: They offer tailored services for business valuation and can provide a more flexible approach tailored to the specific needs of the company.

Lawyers Specialized in Corporate Law

• Services: They can assist in the valuation of companies in the context of legal disputes, restructurings and other legal matters requiring detailed valuation.

Online Platforms and Valuation Software

• Services: They offer online tools for performing business valuations using specialized software. They are useful for quick and less complex valuations, although they may not provide the same level of depth as an analysis performed by experts.

7. Considerations When Choosing a Valuation Provider

• Experience and Specialization: Make sure the provider has specific experience in your company's industry and the type of valuation you need.
• Credibility and Reputation: Choose a firm or individual with a good reputation and credibility in the market.
• Approach and Methodology: Check the approach and methodology used to ensure that they are suitable for your needs and comply with applicable accounting and valuation regulations.
• Costs and Deadlines: Consider the cost of the service and the time required to complete the appraisal. Make sure these aspects fit into your budget and timeline.
• Confidentiality: Make sure the provider has strict confidentiality policies to protect your company's sensitive information.

The choice of a location or professional to perform a business valuation will depend on a number of factors, including the complexity of the valuation, the available budget, and the nature of the business. Consulting with specialized firms, investment banks, CPAs, or independent advisors can provide an accurate and valuable valuation for your needs.

8. Benefits of Valuing a Company

Usually a business can have different values according to who values it, so the main benefit of doing a company valuation study is to have a partial parameter that is as impartial as possible, to make decisions in favor of investors, owners or beneficiaries.

The benefits of valuing a company fall and are born in the general purpose and objective of the interested parties, that can arise from the need to calculate the range of value that seek to be a reliable reference in a negotiation between parties, may also be subject to the objective of identifying opportunities to invest when making an assessment of indicators, or value drivers that may be of interest to the potential buyer, another purpose may be to identify the economic value on certain dates to buy at appreciation or depreciation in the capacity of "value creation."

The benefits of carrying out a company appraisal are diverse and provide very useful information for decision making:

The benefits of the Service that ANEPSA Guarantees when valuing a company are:

The added value in ANEPSA is:

At ANEPSA we are here to help you, contact us.