Determining the value of a company requires a combination of technical knowledge and market experience, and not necessarily in that order.
How much is my company worth? This is a question that is often asked by clients, friends and acquaintances and one for which, to their surprise, there is no direct answer.
In recent years, similar to what has happened in many other fields of knowledge, estimating the value of a company has become trivialised. Observe any forum and you will find advisors, auditors, friends or neighbours vehemently arguing that your company is worth a certain multiplier of EBITDA or a multiplier of sales, or equity plus a multiplier of profit, or any other imaginative formula they may have read about or been presented with from a lectern. However, when the value of a company matches or simply comes close to the parameters of “popular science”, it is nothing but coincidence.
Estimating a company’s value involves two elements. The first, most basic of these, consists of applying generally accepted valuation methods. The second, which is often lacking in most of those performing valuations, is the extensive experience gained through buying and selling companies. This experience provides the valuator with an understanding of the key elements considered by buyers when determining the value of a company and the ability to define a range of values close to the market value of the company.
At IMAP Albia Capital, we have been buying and selling companies since 2004, with more than 120 transactions completed. Thanks to this experience, we understand the elements that go into the market value of a company and how to assess them. Our valuations include both the intrinsic elements of the company and the market elements at any given time, always within a range of market prices. Antonio Machado once said, “Every fool confuses value and price”, and normally when a client, friend or acquaintance asks us what their company is worth, what they are asking for is the price.
A company’s technical value is determined by certain intrinsic aspects such as the company’s balance sheet, income statement, financial forecasts, size, leverage ratio, etc. By applying different valuation techniques, a range of reasonable values for the company can be obtained.
There are multiple methods for determining a company’s technical value, from simple ones based on indicators from the company’s balance sheet, to others based on multipliers of certain items on the company’s income statement, and still others which are mixed methods.
Because it is the most technically accurate method with the greatest capacity to include the parameters that affect value in the valuation model, the most generally accepted method in the international business community is the discounted cash flow method, which is the method recommended by AECA (Spanish Accounting and Auditing Association) and the CFA Institute (Chartered Financial Analyst). The results of this method are different than the ones obtained by applying market multiples to the company’s financial parameters, in that the latter require interpretation.
However, there are multiple factors that can influence the price of a transaction that are not reflected in the valuation methods. The valuator must be aware of these factors and must know how the market is behaving at the time of the valuation. Otherwise, the valuation could be out of line with market prices. Among other factors, the price of a transaction can be influenced by the market situation (buyer’s or seller’s market); the attractiveness of the industry at the time of the valuation (the more “in” an industry is, the greater the upward pressure on prices); the scalability of the business; market liquidity; the company’s strategic relevance to the buyer; the cost of a greenfield with respect to the acquisition price, etc.
To add to the complexity, there are certain types of companies whose market value does not match the results obtained using generally accepted valuation methods, not even when corrected with market price information. These are companies in special situations, either because of where they are in terms of their business development or because of some unique or scarce knowledge or element they possess, or because of the type of business structure that may penalise them financially. In these cases, the price / value of the company must be determined using certain parameters or metrics that are not normally considered in the generally accepted valuation methods.
It is therefore essential to have extensive transaction experience in order to estimate a range of fair market values for a company. At IMAP Albia Capital, we have that knowledge, with more than 120 transactions and more than 200 valuations, a top notch team of professionals and the best valuation tools at our disposal.
