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What is an SME?
A Small and Medium Enterprise (SME) is a business entity characterized by its relatively small size in terms of employees, revenue and assets compared to large corporations. Generally, SMEs are independent businesses that operate in a variety of sectors, from manufacturing to services, their structure Organizational tends to be less hierarchical than that of large companies, which gives them flexibility and agility to adapt to market changes.
SMEs are fundamental to the economic and social fabric of a country, as they contribute significantly to job creation, innovation, economic growth and industrial diversification. SMEs are often driven by entrepreneurs who bring creativity, passion and business vision to its operations, seeking to satisfy market needs and take advantage of business opportunities.
How does business valuation work?
In the past, company valuation in Mexico did not receive considerable attention, but in recent years there has been an increase in analysis related to this topic, this has highlighted the importance of evaluating the relevance of valuation when making decisions in any company, especially in terms of its ability to generate profits, a primary objective for any entrepreneur.
It is a technique commonly used by investors or entrepreneurs to evaluate the real value of the shares of a specific company. In this procedure, the continuous future value of the company is estimated based on its historical performance over time.
The valuation of a company It involves evaluating its value in financial terms. There are several approaches to carrying out this evaluation, and the choice of method depends on various factors, such as the industry in which the company operates, its size, its life cycle and the purpose of the valuation, some of the common methods include the income, which is based on future financial projections of the company; the asset approach, which evaluates the company's assets and liabilities; and the market approach, which compares the company with other similar companies listed on the market. In addition, the valuation may involve qualitative considerations, such as the analysis of management, competition and market conditions.
SME Valuation, What is it?
The valuation of Small and Medium Enterprises (SMEs) It may present unique challenges due to its limited size, structure and resources compared to large corporations, however the process generally follows the same principles as valuing larger companies, although adapted to the specific circumstances of SMEs.
Common valuation methods, such as the income approach, the asset approach and the market approach, can be applied to SMEs, However, because SMEs may have less financial information available and operate in less liquid markets, analysts may need to adjust valuation methods to reflect these differences.
Furthermore, in the valuation of SMEs, it is crucial to consider qualitative factors, such as the quality of management, brand and reputation in the market, relationships with customers and suppliers, and the economic and regulatory conditions that affect the sector in which the company operates.
In many cases, the valuation of SMEs may require a more creative and judgment-based approach due to the lack of comparable data and the need to take into account intangible factors that can influence the value of the company, therefore, It is important to have experience and knowledge of valuation professionals of companies that can adapt standard methods to the specific needs of SMEs.
How to value an SME? Factors to consider
Appraise A Small and Medium Enterprise (SME) involves considering a variety of both quantitative and qualitative factors.
Here are some key aspects to keep in mind:
- Cash Flow: Evaluate the company's current and projected cash flow. This involves examining revenues, operating costs, financial expenses, and the investments needed to maintain and grow the business.
- Actives and pasives: Analyze the company's tangible assets (such as equipment, inventory, properties) and intangible assets (such as brand, patents, loyal customers), as well as its liabilities (such as debts, financial obligations).
- Cost effectiveness: Consider the historical and future profitability of the company, this includes examining profit margins, return on investment (ROI), and other relevant financial indicators.
- Growth: Evaluate the company's growth potential, which involves considering market demand, the ability to expand into new markets, launch new products or services, and take advantage of growth opportunities.
- Market positioning: Analyze the company's competitive position in its industry, this includes examining market share, brand perception, customer loyalty and competition.
- Management and team: Evaluate the quality and experience of the management team and key employees. Leadership ability, industry experience, and the ability to execute strategies are important aspects to consider.
- Macroeconomic and regulatory trends: Consider how external factors, such as changes in the economy, government regulations, or market trends, may affect the business.
- Risks: Identify and evaluate risks associated with the business, such as operational, financial, legal, technological or reputational risks.
When valuing an SME, it is important to use a combination of valuation methods, such as discounted cash flows, comparable market value and net asset value, and taking these factors into account and conducting a thorough analysis can help obtain a more accurate and complete valuation of the company.
Who can value an SME?
The valuation of an SME is a complex process that requires experience and specialized knowledge in finance, accounting, market analysis and other aspects related to the business.
Some options on who could carry out the SME valuation:
Professionals in finance and accounting: Certified public accountants (CPAs) and financial consultants with experience in business valuation can perform a detailed valuation of the SME. They have the training and knowledge necessary to evaluate financial statements, identify key factors that influence the value of the company, and apply appropriate valuation methods.
Business consultants: Consultants specialized in business advice can offer business valuation services, including SMEs. They have experience analyzing the financial and strategic viability of businesses, allowing them to conduct comprehensive company assessments and provide recommendations based on their analysis.
Valuation consulting companies: Some consulting firms specialize in business valuation and may offer specific services for SMEs. These firms typically have professionals with industry experience and access to specialized tools and resources to carry out an accurate valuation.
Business Brokers: Brokers specialized in buying and selling companies can provide valuations as part of their services, have experience in evaluating the market value of companies and can offer insight based on recent transactions in the market.
Independent evaluators: In some cases, it is possible to hire independent evaluators to carry out the valuation of an SME. These professionals may have experience in the company's specific industry and can offer an unbiased assessment of the company's value.
It is important to select a professional or firm with the appropriate experience and credibility to ensure that the valuation is carried out accurately and reliably, and it is also advisable to seek references and conduct research on the appraiser's history and reputation before engaging their services.
Main methods for valuing SMEs
In general terms, it is possible to carry out the valuation of an SME using one of three different methodological approaches.
- A common approach involves considering the company's current and projected profits, this is called Income Focus, and its main method is the analysis of Discounted Cash Flow
- Another approach is to compare the company with similar companies that have recently been sold, analogous to evaluating real estate, this is known as the Market Focus, and within this approach is the common method called Analysis of Comparable Companies.
- The third approach is the Net Book Value, consists of the difference between the total assets and total liabilities of a company or individual at a given time. It is calculated by subtracting all financial obligations (liabilities) from all assets you own.
Sometimes a company's reputation or unique characteristics can also influence its value, experts may even combine various methods To obtain a more accurate valuation, a common method could be to use Discounted Cash Flow as the main technique for valuing the company, and then back it up with a Comparable Business Analysis.
In addition to the three main categories of valuation methods mentioned above, there are some steps that are typically necessary regardless of the approach taken.
Steps to follow for the valuation of an SME
In addition to selecting the valuation method, there are certain steps that a valuation professional can follow to value an SME, regardless of the valuation method chosen.
These steps may be similar to the following:
- Collection of financial information: Gather the company's financial statements, tax records, cash flows, and any other relevant financial data. This compilation will make it easier to understand the company's historical financial performance.
- Industry analysis: Do your research and gain a thorough understanding of the industry in which the SME operates. Industry dynamics, trends and growth prospects can influence the company's valuation.
- Selecting a valuation method: There are several methods available for valuing SMEs, which are detailed below.
- Valuation calculation: Apply the selected valuation method to standardized financial data, for example, in the income approach, calculate the present value of future cash flows, or in the market approach, compare the SME's ratios with those of comparable companies .
How to improve the valuation of SMEs?
The valuation of your small business will be tied to its current profits, reducing costs and increasing revenue are two critical aspects of improving a business's valuation, and every SME should determine which areas to focus their efforts on.
Many SMEs have seen positive results after hiring a professional appraiser or appraiser, an experienced appraiser will be able to determine the current valuation and help you identify both the strengths and weaknesses of your business.
Additionally, a valuation service must have the experience necessary to offer recommendations to improve the valuation of your SME. You should also be familiar with other ways of communicating the value of your company to potential investors or buyers, for example, you will attract more buyers if you can demonstrate how systems and processes can ensure the business runs effectively even after you exit.
Alternatively, you could show potential buyers that your employees are happy and taking on their responsibilities, low staff turnover is an attractive unique selling point for any buyer as it can help save money and ensure a smooth transition to the new administration.
