Company valuation

Many business people are surprised to see that their company is worth much more than the assets (minus liabilities) at market value. The key is to know this value and be able to justify it to a potential buyer.

For any entrepreneur or person in business, it is fundamental to know the value of their company as it is one of the most important parts of their net worth.

As a result of the economic crisis, many business people have wanted to sell their businesses but are unaware of the intrinsic value of their companies. In other cases, the retirement of the owner without a member of the family to pass it on to or simply the need for liquidity has led to the request for a valuation of the business

Why should my business be valued?

• When we decide to sell the company, look for a partner, increase the capital value, look for a potential investor, merge with another company, etc. This will provide a list of arguments and counter-arguments that will strengthen the negotiation of the requested price.
• During the restructuring of operations, if we hope to sell a part of a company or simply abandon a product or a business.
• Start up or entrepreneurial projects which need the drawing-up of a business and feasibility plan. In the majority of cases, this planning is required by both public authorities and business angels as well as any other organization that is interested in investing in the project.
• To evaluate intangible assets and goodwill during potential transactions with shareholders and investors.
• Valuations for the purpose of the drawing-up of financial statements resulting from the application of accounting rules (impairment test, transfer prices…).
• In the event of family inheritances, or when wills are being prepared.

How should a business be valued?

Unfortunately on many occasions, valuations are restricted to the evaluation of assets at the liquidation stage or by means of the book value without taking into account the amount of money that the business is itself able to generate. However, in the international financial community, there is consensus when a company is valued which is based on the discounted cash flow subtracted from the weighted average cost of capital (WACC).

Simplified, this sophisticated model shows that the value of a company depends on the cash flow that it will be able to generate in the future minus a rate related to the risk of investing in this project. As a consequence, this method of valuation is much more advanced than a simple liquidation of the assets at the market price as it takes into account the wealth that the aforementioned assets could generate in the normal activity of the business. The process of valuing a company is a long and arduous one that involves the preparation of a profit and loss account, a balance sheet and the state of the cash flow in combination with a hypothetical forecast and a complex model of updated cash flows.