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Every entrepreneur must have heard about the importance of having a professional evaluation of your company. The call valuation of companies it is usually the most discussed subject when there is an intention to buy or sell a company. But this is a very important process also for monitoring the business.
Simplified valuation calculation
To understand the importance of this methodology for evaluating the corporate environment, it is necessary to know what the valuation of a company and what are the methods normally used for this type of calculation.
Valuation is nothing more than the calculation of the value of a company. Based on this methodology, it is possible to find the fair value of a company. But it is important to remember that this calculation is not intended to arrive at a single, closed price.
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Different valuations of the same company can lead to different results. This is because the methodology for evaluating companies ends up using subjective variables.
Still, the valuation of a company becomes extremely important for the entrepreneur to have in his hands information about profitability, growth, situation of assets and liabilities, strength of the brand and longevity of his business.
These are the points that strengthen a company and that will indicate whether or not it has prospects of prospering in the long term, and even if it is a good time to put it up for sale.
Valuation methodologies
There are a few different methods for calculating a company's valuation. They are: discounted cash flow; multiples; and asset value. Below we explain a little about how each of them works:
discounted cash flow
Calculating the value of a company by cash flow or income calculates the present value of a company's cash flows, subtracting the debt value afterwards, which will demonstrate a company's profit perspective in the future.
As we mentioned, this is not an account that reaches a closed value, so two different valuations on the same company can reach different values. In this methodology, it is necessary to define some calculation assumptions, such as the main impact factors for the future of the company, also evaluating the prospects for improvements that it may have.
market multiples
Valuation by market multiples occurs when the company's value is calculated in a comparative way to other competing or similar companies in the market, using data such as EBITDA, net income, or the companies' operating cash flow.
If the company is publicly traded, normally this calculation is already done based on the market value it has or obtaining financial information through the balance sheets. For privately held companies, the process takes place through the analysis of similar companies.
book value
A less common methodology is valuation based on the company's book value. This method consists of the sum of all the assets of a single company. That is, real estate, equipment, money, products in stock, among other factors, minus debts, enter this account.
The downside, however, is that the valuation at book value does not consider the strength of the brand and its growth potential, which may make the result a little lower compared to the other methodologies mentioned.
Valuation advantages
Carrying out a company valuation provides important information to the entrepreneur, who can use it both to find out if his business needs a reorganization to have greater growth prospects in the future, and to understand what is the current and fairest value of his company in the future. moment of a negotiation for sale.
Investors also use valuation as a way to assess whether a particular company is interesting or not to invest in compared to other competitors in the market.
Valuation can also be used at the time of a partial sale of companies between partners. In this way, the partner who is leaving the business will be able to know the fair value to be received for his share of the company's shareholding.
Because it is a complex process that requires attention to important variables and assumptions, valuation should always be carried out with the help of professional advice, which even helps when negotiating the purchase and sale of a company for the best value and lowest risk.
Source: capital investment – specialized advice on mergers and acquisitions.
