By Richard Timman
Business transfer specialist
The value of a business is not a magic number. It is a well-founded story about what the company can earn in the future, how much risk is involved and how attractive it is for a buyer. Numbers play a big role in this, but so do the market, the organization and the degree of transferability.
Value is often confused with price. Value is what a buyer thinks the business will fetch over time. Price is the amount finally agreed upon after negotiations. With proper preparation, the distance between value and price can be reduced.
When determining the value of a business, three main factors are typically considered. These provide a complete picture of the company's current performance, future opportunities and risks.
1. Performance today - how is the company running now?
The buyer assesses the current financial health of the company. This looks at sales, profitability and cash flows over several years. Stability in results, healthy margins and recurring revenues are valued positively. Strong fluctuations or dependence on incidental revenues, on the other hand, can depress the value.
2. Outlook for tomorrow - what growth potential is there?
In addition to current performance, the company's market position and growth opportunities are considered. Factors such as the size and development of the market, the distinctiveness of products or services, and the presence of economies of scale play an important role. Companies that are well positioned to capitalize on trends or enter new markets often receive higher ratings.
3. Risk and transferability - how dependent is the business on the current owner?
The buyer assesses the extent to which the business can function without the current owner. This includes the extent to which processes are established, the presence of a strong management team, and the spread of customers and suppliers. A business with low dependence on the owner and a wide spread customer base is generally considered less risky and therefore more valuable.
To arrive at a valuation, a consultant can use several methods. Each method has its own focus and is appropriate for specific situations. Several methods are often used side by side to arrive at a realistic and well-founded result.
1. Discounted Cash Flow (DCF).
The DCF method involves estimating the company's future free cash flows. These cash flows are discounted to their present value, taking into account the risk that these cash flows will not be realized. This method is accurate, but highly dependent on growth and margin assumptions.
2. Multiple-method
The multiple method determines value by multiplying a measure of earnings, such as EBITDA (earnings before interest, taxes, depreciation and amortization), by a factor common to the industry in question. This factor is often derived from recent transactions of comparable companies. The method is relatively simple and well in line with what is common in the market.
3. Asset Value
The asset value method looks at the value of all the company's assets, minus its liabilities. This may be relevant, for example, for companies with many fixed assets or for companies where profitability is limited but the balance sheet represents a high value.
In conclusion
The value of a company is determined by a combination of performance, growth potential, risks and the outcome of applied valuation methods. A careful process and realistic assessment of these factors provide a more informed value and strengthen one's position in negotiations.
By Richard Timman
Business transfer specialist
