Specialisation, Independence, commitment and result oriented relationship

Corporate Finance M&A

Valuation of companies
and invesment projects

Why IMAP Albia Capital

  • Closeness to the market: IMAP Albia Capitalprovides you with professionals with an in-depth knowledge about valuation techniques for companies and projects and, more importantly, with extensive experience in mergers and acquisitions (M&A). This approach ensures that the results conform to the market, thus avoiding disappointments as a result of expectations not in line with this.
  • Key points for negotiations: IMAP Albia Capitalidentifies the key factors for the valuation, both those which contribute value and those which reduce it, and prepares the best way on how to argue them during negotiations.
  • The operation’s structure: IMAP Albia Capital not only values a company but it also provides options on the best way to carry out the transaction so that our client can be in a position to optimise this.

Key factors for an appropriate valuation

Selecting the firm that values your company or investment project is a major decision. Your appraiser must not only have thorough knowledge about the valuation techniques but it must be permanently in contact with the M&A market so that it has the capacity to distinguish if the underlying value of your company or project obtained by applying the valuation methods conforms to what the market is willing to offer. This can only be achieved if the valuation of your company or project has been made by a firm used to providing advice, negotiating and brokering M&A transactions.

At IMAP Albia Capital, we supplement our in-depth knowledge on valuation techniques with an extensive experience in mergers and acquisitions (M&A).

When should we commission a valuation?

Company valuations are usually commissioned when there are changes in the shareholder structure:

  • Acquisition of companies
  • Sale of companies
  • Mergers
  • Sale of a share package
  • The entrance of a new partner in the company (e.g. venture capital)
  • Purchases and sales of shares among company partners. Disputes among partners
  • Valuation of activity lines
  • Valuation of investment projects
  • MBOs, MBIs, plans to include employees in the company’s capital
  • Joint-Ventures
  • Independent valuation reports

IMAP Albia Capital has provided company valuation services to both large listed groups and SMEs. Regardless of its size, a company’s valuation is always complex because of the strategic or technological factors or the market situation that affect the firm’s prospects and, consequently, its valuation.

IMAP Albia Capital has the technical knowledge and experience required for valuing each particular case.

Should we value a company in other situations?

The company valuation process has a high strategic component since it identifies the factors that provide most value to a firm and those which reduce it. This enables shareholders and managers to focus on creating value by acting on the value-generating factors and mitigating the negative ones that decrease the value of a company or investment project.

Although company managers use diverse parameters to assess their conduct, it is more complicated to assess the managers’ decisions and conduct at unlisted companies in terms of value creation. The best way to measure this value creation is to perform periodic valuations. Since a company valuation provides its value at a specific time,periodic valuations enable shareholders to assess the value creation in a certain period and, therefore, evaluate the managers’ conduct and decisions.

Factors that influence the value

There is more than one way to value a company or project. A company can be valued in a different way depending on who makes the valuation since there are numerous elements that influence this. The main ones are as follows:

  • Appraiser: Shareholders tend to overestimate their company’s value as a result of objective factors (historical profits) and subjective elements (efforts made to position the company where it is today).
  • Economic cycle: Likewise, the economic situation also affects a company’s value: in expansion phases, the appetite for buying companies tends to be greater, which increases competition and, consequently, the price it is willing to pay. Conversely, in crisis situations, there are fewer interested parties and there is usually less capital for investments, which reduces demand and lowers prices.
  • Sector: The sector also has a considerable influence on a company’s estimated value. Companies in future or “fashionable” sectors tend to have a higher value than if they operated in more mature industries.
  • Size: A company’s size and the illiquidity of unlisted companies’ shares jeopardise the valuation.
  • Risks: The situation of the company itself evidently influences its estimated value. The company’s performance, the consolidation and risks of its products, market and technology, the adaptation of its structure, its debt level and other factors also have an impact on the valuation. And remember that the management team’s quality is always considered by the buyers when making their estimates.

Lastly, the way in which a company is sold also affects its valuation. There is a big difference between a company sold using a well-structured process aimed at attracting diverse potential candidates and using a process that is restricted to a few contracts or, as has happened several times, the negotiations are made exclusively with the first company that made a bid.

IMAP Albia Capital considers the various factors that affect a valuation so that its clients have a realistic estimated value of a company or investment project.

Valuation methods

An appropriate valuation and an understanding of the factors that influence the value of a company or project are fundamental for determining the right price to be offered or the amount that can be expected to be obtained from an acquisition, sale, merger or other capital transaction.

However, estimating a company’s intrinsic value is a complex task since it not only requires making calculations and applying commonly accepted methods, it also needs objective and subjective factors which require the appraiser to provide criteria and experience, which implies a lot of subjectivity. They usually say that the valuation of a company or project is more than just a scientific procedure and has now become an art.

There are several company valuation methods, although the main ones used at present are as follows:

  • Asset-based methods: These estimate a company’s value based on its investment, assets and liabilities. The methods include the net book value, the adjusted net book value, the replacement value and the net asset value. Their virtue is that they are simple but they do not take into account other large company assets such as goodwill or the capacity to generate profits.
  • Income-based methods: In these methods, a company’s assets are valued based on the profits that they yield. Therefore, the market value of these assets themselves is not relevant; what is important is their capacity to generate future financial income. The most common method within this approach is the discounted cash flow (DCF), which estimates the income that a business is able to generate which can be detracted from the business without reducing its capacity to continue generating this in the future (free cash flow). Since this flow is generated in the future and because of the different time value of money, this method estimates the cost of the income used by the company (discount rate) to discount this flow at present, considering both the business risk and its financing structure.
  • Market-based methods: These estimate a company’s value by applying certain ratios (e.g. value/EBITDA, P/E, etc.) to transactions that have taken place in the market involving similar companies. Two sources are usually used to obtain the ratios or multiples: i) comparable listed companies; and ii) acquisitions and sales of companies in the same sector. The advantages of these methods are that they are simple to apply and the market value provided can be used, although the appraiser must have a good criterion to assess the impact of certain factors on the correct application of the method (e.g. if the comparable companies are considerably larger or if the business expectations differ significantly from those of the comparable businesses, an adjustment has to be made to the values obtained in this method).

As stated above, the diverse valuation methods, the different factors that affect an estimated value and the subjectivity involved in the process mean that selecting an appraising company is important since a good valuation requires both in-depth technical knowledge and close contact with the market reality.

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Paseo de la Castellana, 141
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28046 Madrid
Tlf. +34 91 749 80 64

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