As part of establishing the value of a company, we have seen the basic principles. We start by having the right EBITDA, we multiply it by a multiple and we obtain an enterprise value… Now we have to make adjustments… which we call “balance sheet” adjustments…
The principle of this valuation method is based on the delivery of a company that would not have cash, normal working capital for its operations, and assets in operating condition, with the assumption of a rented premises, without term debt. These five families represent the most frequent adjustments.
It is normal to add the company’s cash to the value of the company. However, the level of working capital required to operate the company must be validated. Sometimes we subtract value, because there is a lack of solidity in the working capital (suppliers are too stretched, the margin is too used), sometimes we add when the company has a very strong position (liquidity situation, no margin of credit, and suppliers paid at 10 days).
At the level of long-lived assets, if certain assets are not required in the normal course of operations, or have just been acquired for an expansion, their value can be added. The opposite is true, if all the equipment is obsolete, the value of the company is diminished.
When the company owns its building, it is better to adjust the EBITDA by attributing a rent to it at the market value, we can thus add the value of the building in our evaluation… often the book value is much less than the market value…
The last point is when we announce to them that the long-term debts must either be assumed/replaced by the buyer or paid at the transaction… if we add the interest to the EBITDA, it is therefore that we are reassessing the debt capacity of the company.
Phrases heard from entrepreneurs include “I want $X plus my inventory and receivables”, “I want $Y because that’s what I need to live on…” — Unfortunately, magic doesn’t exist and if a buyer can’t see how they would make money from the business… well… they won’t buy it.