Aspects of business valuation include:
- Basic principles
- How to calculate EBITDA
- Which multiple to use
- Adjustments after the closing
How to evaluate a business? The question often comes back to us, and answers are multiple depending on who evaluates, for what reason, what are the assets, what sector of activity, etc.
The “fair market value” of a business is based on risk calculations and return projections; it is also established at a certain date in time! Value is determined by the company’s ability to generate future cash flows. The value of the enterprise is therefore a function of the risk associated with the realization of future cash flows.
Valuation specialists generally recognize three approaches to valuing a business.
- The asset-based approach: this accounting approach is used to establish the value of assets, whether they are in operation or whether the assets are being liquidated.
- The discounted cash flow approach makes it possible to estimate the present value of future cash flows.
- The market approach: this method assesses what investors have paid/are willing to pay for a comparable company.
It is important to note that the book value does not equal the fair market value, since certain elements could be subject to adjustments: the revaluation of assets (particularly buildings), intangible assets, shareholder compensation, etc.
Beyond the numbers, valuing a business should also consider factors such as:
- What are the strengths/weaknesses of the company?
- Why is the business for sale.
- Dependence on customers or suppliers.
- The laws or regulations that govern the industry.
- … so many factors that can affect the value of a company.
An evaluation, even a summary one, made by an independent and neutral professional makes it possible to undertake a negotiation process on a clearer basis.