VALUATION X SALE PRICE
It is noticed an increasingly interest from entrepreneurs to find out the valuation of their businesses. However, they are rarely aware of the great complexity involved in a process of business valuation, its different assessment methods and the difference between valuation and the price the market is really willing to pay for the company. This article will talk about the two main methods used to valuate companies and the differences between the value obtained through these methods and the sale price.
The Discounted Cash Flow is a widely known method of business valuation and it comprehends the forecast of future cash flows of the company brought to present value through a rate that reflects the risk of the business. In the cash flows, it is estimated the cash entries and outflows, including all taxes and necessities of investments that will support the growth, then getting to what would be net for the shareholders. This cash forecast must be prepared with extremely care and focus on reality of the business, because any planning mistakes can have huge impacts in the final enterprise value.
The projected results are directly related to strategies adopted by the company and they can change accordingly to the perspectives of who is running the business, what means that the company has different values for each party involved. Besides, the discount rate is very important, it must be coherent with the risk of the business; In practice, the discount rate generally corresponds to debt average cost.
Multiples through common variables analysis is the second most used method for companies’ valuation. In this case, it is assumed that enterprise value is similar to the value of other comparable companies, because the market has the tendency to value them correctly. The variables used may differ, some of the ones that can be chosen are: annual EBITDA, net profit, revenues and customer base. When the EBITDA is picked as basis for valuation, it is recommendable to bring it to normality level, keeping out from the calculation extraordinary factors that might increase or decrease the value.
The business valuation is generally used for negotiation with investors and as a parameter for the shareholders; however it will hardly be the sale price paid by investors, because on the enterprise value there are additions and exclusions of other amounts such as debts with third parties, non-operational assets and assets and liabilities’ fluctuations as a result of the working capital transactions. The sale transaction will be most likely to happen when the amount offered by the potential investor is higher than the valuation in the shareholders’ perspective.
Do you know how much your business is worth? You have interest in raising investments and don’t know where to start? Talk to a consultant from Dutra Business Management to get more information.
By Gabriela Kauer