Business Valuation in Mexico Methods, process and benefits · Certified Experts
The valuation of a company is a comprehensive process that seeks to determine the economic value of a business based on its environment and its component elements. This process analyzes assets, liabilities, and intangible factors such as brand, personnel, and technology
What is the purpose of valuing a company?
Finding accurate ways to identify and measure the economic and operational relationship of a company based on current and future business conditions, within a set of internal and external factors.
To achieve this, the following steps are taken: an analysis of administrative, legal and financial, commercial, operational and market characteristics. Through it, you can find the profile of products and services, the market opportunities and limitations of the company, as well as its strengths and weaknesses.
The main factors are:
Economic
Inflation, interest rates, GDP growth, and purchasing power of the target market.
Competitive positioning
Position within the sector: market share, competitive advantages and barriers to entry.
Operating characteristics
Production processes, installed capacity, operational efficiency and business margins.
Agents' motivations
Interests of shareholders, managers, and investors that affect the negotiation of value
The main purposes of valuing a business can be to:
Analysis of investments, acquisitions, placement of capital on the stock exchange, mergers, evaluating and remunerating managers, compensation, payment in kind, reengineering, merger-acquisition, dissolution of company, administration and strategic planning.
Business Valuation Methods
There are 4 methods for valuing a company which are usually the most common, with the discounted cash flow method being one of the most popular.
2.1 Discounted Cash Flows (FCF)
The most popular and common technique for valuing companies and investment projects is the methodology of discounted cash flow, establishing free cash flows that are discounted using the technique of VPN, considering the risk rate to be WACC (k).
This technique involves calculating the value of a company by estimating its expected cash flows. to be generated in the future, adjusted to present value using an appropriate discount rate.
This method is unique in its attempt to accurately represent the company's current situation by integrating all the variables that influence value creation: investments, expenses, and growth. perpetuity is used in the DCF method to represent constant flows that continue indefinitely into the future.
Calculation of Free Cash Flow (FCF)
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 main financial metrics such as revenue, EBITDA, EBIT, SALES and net profit.
To use this approach, it is necessary to have a significant set of companies comparable to the entity to be valued and whose business is not affected by unusual circumstances.
The most commonly used financial multiples:
- Enterprise value / EBITDA multiple: It is calculated by dividing the total value of the company (market capitalization plus net debt) by EBITDA. It is the most commonly used multiple in transactions. mergers and acquisitions.
- Enterprise value multiple / SALES: It is obtained by dividing the total value of the company by its revenue. It compares the total value with its sales level.
Once these multiples of comparable companies are obtained, an average or range is calculated and applied to the company being valued. This method has the limitation of not considering qualitative aspects of the company.
2.3 Balance Sheet or Net Accounting Value
The balance sheet method is a technique based on the analysis of a company's financial statements, especially its balance sheet. It seeks to determine value by evaluating its assets, liabilities, and net worth.
This method considers all the business's assets to calculate its value, taking into account the accounting balance sheet, but it does not consider its history or future performance. Some of the most commonly used methods are:
- Adjusted value
- Net real assets
- Liquidation value
- Substantial value
- Book value
It is useful when the company has substantial assets that could be liquidated to settle its liabilities. It does not consider the time value of money or intangibles that are not reflected in the books.
2.4 Mixed or Goodwill
The mixed method combines elements of the previous methods to offer a more complete valuation, considering the goodwill or additional value related to reputation, brand, and other intangible factors.
It is especially useful for companies with a high brand value, a consolidated customer base, or competitive advantages not reflected in their balance sheet. It is the most recommended method for SMEs with significant tangible and intangible assets. For detailed information on the valuation of intangible assets, please see our page on valuation of intangibles.
Applications of Valuation Methods
3.1 Discounted Cash Flows — applications
The Free Cash Flow (FCF) method has several significant applications for both internal management and for evaluating the company's attractiveness to investors:
Share buyback
FCFE can be used to repurchase outstanding shares, which increases the value of existing shares and improves returns per share.
Debt amortization
Reduce debt levels through prepayment, lowering interest costs and improving the company's credit profile.
New investments
The funds generated as free cash flow can be reinvested to finance new projects, expand operations, or acquire strategic assets.
Cash reserve
A prudent strategy to handle unforeseen events and ensure operational liquidity in the face of economic fluctuations.
FCFA for shareholders
Free Cash Flow to Shareholders represents the cash available to distribute dividends, repurchases, or reinvestments.
Attracting investors
A positive and growing free cash flow is a sign of a financially sound company and increases its attractiveness to potential investors.
3.2 Balance Sheet or Net Book Value — applications
This approach is especially useful in situations where:
- The company owns significant assets that can be easily liquidated.
- A valuation based on direct book value is sought, as in cases of asset sale or liquidation.
- The market for comparisons is limited or the company has few intangibles that are not well reflected in the accounting records.
Elements of a Valuation Process
The process of valuing a company usually begins with a due diligence and profile creation, followed by a preliminary financial analysis that shapes the development of a proprietary financial model, and once the financial model is completed, the results and conclusions are interpreted.
The elements of a business valuation process are divided into:
| Category | Elements included |
|---|---|
| Technical Elements |
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| Business Elements |
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| Negotiation Elements |
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Company Valuation Process
Information Gathering
All the company's operational, financial, and legal information is gathered:
- Fixed and current assets: Properties, machinery, inventories, and other physical assets. See fixed asset inventory.
- Liabilities: debts and financial obligations of the company.
- Intangible assets: trademarks, patents, copyright and technology.
- Human resources / legal / general information to identify property relevant to the business.
Cash Flow Projection
The future capacity of the company to generate cash flow or profits is estimated. This includes projections of revenue, operating costs, capital investments, and changes in working capital, reflecting expected long-term growth and performance influenced by internal factors (operational efficiency) and external factors (market conditions).
Selection of Valuation Method
- DCF: Calculate the present value of future cash flows discounted at the WACC.
- Multiples: Compare the company to similar ones via EBITDA, earnings or sales.
- Balance / Net Book Value: Determine the value based on net assets adjusted for liabilities.
- Mixed or Goodwill: It combines methods that consider intangibles and reputation. Ideal for the going concern appraisal.
Development of the Financial Model
A financial model is created tailored to the specific valuation needs. This model integrates the collected data and projections to provide a accurate estimate of the company's value. It may also include the evaluation of investment projects as part of the analysis.
Interpretation of Results
The results of the financial model are analyzed to establish the projected value. The interpretation must be consistent with financial valuation standards in Mexico (NIF B-7, NIF C-15, IFRS) and consider the results of the different methodologies applied.
Valuing a company usually requires the intervention of multidisciplinary groups. The Anepsa team mainly includes: financial experts, economists, actuaries, legal experts, tax experts, and, in some sectors, technology and environmental experts.
Where can I get a business valuation done?
Valuing a company is a specialized process that requires technical and financial expertise. Several options exist depending on the complexity and purpose of the valuation.
Financial Consultants
They offer valuations as part of their consulting services. They have experience in complex valuations and provide detailed analysis.
Valuation Firms
They specialize in business valuations with detailed analysis of cash flows, assets, and risks. A thorough and tailored approach.
Investment Banks
They perform valuations in the context of mergers and acquisitions, IPOs and other significant financial transactions.
Certified Public Accountants (CPAs)
CPAs with valuation experience carry out analyses as part of their accounting and auditing services, useful for detailed reviews.
Independent Consultants
Financial advisors with a flexible and personalized approach, adapted to the specific needs of each client company.
Corporate Lawyers
They collaborate on valuations for legal disputes, restructurings, and other legal matters that require detailed valuation.
Online Platforms and Software
Useful for quick and less complex valuations, although they do not provide the depth of an analysis performed by experts.
Considerations When Choosing a Valuation Provider
The choice will depend on the complexity of the valuation, the available budget, and the nature of the business.
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 with a good reputation and credibility in the market, with verifiable references from previous clients.
Approach and methodology
Verify that the approach and methodology used comply with applicable accounting and valuation standards.
Costs and deadlines
Consider the cost of the service and the time required. Make sure they fit your budget and timeline.
Confidentiality
Verify that the provider has strict confidentiality policies to protect your company's sensitive information.
Benefits of Valuing a Company
Usually a business can have different values depending on who is doing the valuation. The main benefit of conducting a professional study is to have the most impartial benchmark possible for making decisions that benefit investors, owners, or beneficiaries.
The benefits lie in the general and objective purpose of the stakeholders: to calculate a value range that serves as a reliable reference in a negotiation, identifying investment opportunities through analysis of value drivers, or establish the economic value on specific dates to compare appreciation or depreciation in the capacity to create value.
The benefits of conducting a business valuation are:
The service benefits that Anepsa guarantees when valuing a company are:
The added value at Anepsa:
Business Valuation — Explanatory Video
See how we conduct a business valuation at Anepsa. Learn about the methodology, the team, and the complete process.
At Anepsa we are here to help you. Contact us to request your professional valuation.
Frequently asked questions about business valuation
How much does it cost to value a company in Mexico?
The cost varies depending on the size of the company, the scope of the study, and the methodology used. At Anepsa, we conduct a personalized evaluation. Contact us for a quote.
How long does a business valuation take?
The entire process takes between 2 and 6 weeks, depending on the size of the company, the availability of financial information, and the methodology applied, companies with well-organized financial statements and complete documentation can receive their audit opinion in 2 to 3 weeks.
What documents do I need to value my company?
The basic documents required are: financial statements for the last 3 to 5 years (balance sheet, income statement and cash flow statement), tax returns filed with the SAT (Mexican Tax Administration Service), articles of incorporation, relevant current contracts, and inventory of fixed assets. The more complete the information, the more accurate the valuation report will be.
What is the best method for valuing a company?
There is no universal method. Discounted Cash Flow (DCF) is the most widely used method for operating companies with a stable financial history. market multiples It is ideal when sector-specific comparables exist. For companies with many physical assets, the net book value It may be more representative. It is recommended to apply two or more methods and triangulate the results.
Is a business valuation legally valid in Mexico?
Yes, when it is issued by a certified appraiser and complies with the Financial Reporting Standards (NIF B-7, NIF C-15) and applicable IFRS international standards. This type of report is accepted by notaries, financial institutions, the Mexican Tax Administration Service (SAT), and in judicial or arbitration proceedings.
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