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The value of a company: factors affecting its valuation

Knowing the value of a company is of great importance for various situations, such as selling it, merging it or even facing the market in which you operate to know the role your company plays and understand your competition. Although calculating the value of your company can be a complex task, it is not impossible. Find out here how to calculate the value of a company and what are the valuation criteria you should follow, let’s get to it!

What is the value of a company?

The first thing to mention is that a company will be worth what they are willing to pay for it. Although it is a truism, this is the basic principle to understand that the valuation of the company will determine its path and growth.

That said, we can say that the act of valuing a company is to determine its value. If someone wanted to invest in one, they would first want to evaluate whether it would be worth investing money and time in it. It is not only about its cost or what its selling price would be, all aspects must be taken into account, including its assets.

It is important to understand that the value of a company has nothing to do with its price. The price is the specific value, being materialized at the moment of making an offer to buy it and what the market demands at that moment indicate. Whereas, the value is what the company receives according to its profile, it is a monetary measure of how useful it could be.

When should a business valuation be performed?

The value of a company depends on more than just money, it depends on external and internal factors of an economic, market and social nature, etc. It never hurts to make the valuation of your company, but there are situations where it becomes essential, such as:

  • Incorporation or withdrawal of any of the organization’s members who are not listed on the stock exchange.

  • Administrative management analysis aimed at maximizing the value of the company.

  • Analyze the effort needed during the business venture.

  • Purchase and sale transactions.

These are some of the situations where it becomes essential to calculate the value of your company. However, they are not the only ones.

 

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What does a business valuation consist of?

An important point to clarify is that a valuation process is not an audit, since the analyst does not perform an audit of financial statements, but starts from figures that are initially considered valid.

Nor is it a matter of making an exhaustive diagnosis of all areas of the company, but should concentrate from the outset on the critical areas that serve to discover the value drivers.

In this sense, the valuation of your company is a technical task that requires extensive financial knowledge, as well as a full understanding of your business model: its strategy, its market and where its elements of value are concentrated.

It should also be noted that carrying out a valuation requires the most accurate and professional treatment possible. By this we mean that it must be impartial, without the intervention of the founder(s) or anyone linked to the company. Whatever action is to be taken with the company, the value must be adjusted to what is indicated in the market.

5 factors that determine a company’s value

In addition to using specific formulas that help in calculating the value of companies, it is important to know the factors that are usually taken into account for this type of procedure:

  1. Tangible assets, which include machinery, property, real estate or inventory. Generally, it is a simple task to calculate the value of these types of assets.

  2. Intangible assets include elements such as trademarks or patents or brand recognition. These assets are capable of adding great value to the organization and their monetary value should be taken into account.

  3. Liabilities, encompasses any debt that the company may have outstanding and, undoubtedly, this significantly influences its valuation.

  4. Financial metrics indicate the profitability of the business, its annual profits, the revenues and profits it generates, etc. It is important to know the internal and external financial statements of your company in case a buyer or investor wants to know details about it.

  5. Its performance in the market. To determine this factor, it is necessary to know the competition and the situation of the business in relation to them. Following this factor, the valuation can be carried out more simply if the company is listed on the stock exchange.

 

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Company valuation methods

There are different methods of company valuation that have been developed at the same time as economic science and corporate finance have advanced. This means that these methods are fully adapted to the current context. Thus, these methods can be divided according to their object of study:

Methods based on balance sheets

This analysis focuses primarily on the fundamental analysis of the company. That is to say, it concentrates its attention on the book value, substantial value, liquidation value and real net assets of the firm. Currently, it is one of the most common and widespread criteria.

Criteria based on income statement

This criterion normally consists of the application of specific multiples to parameters specialized in measuring results. For example: P/E ratio, sales, Earnings Before Interest (EBITDA), Taxes, Depreciation, and Amortization.

The application of these allow interesting approximations to be made about the value of a company in the market.

Flow discounting

This is one of the most commonly applied criteria in company valuation, but what does it consist of? Basically, it is an estimate of the value of the company based on the future generation of profits, which is a way of anticipating the reality of the business in the future.

Option-based methods

The option-based method attempts to assimilate the valuation of an intangible asset with the valuation of a call option. In principle, it helps to reduce uncertainty and promotes flexibility in business decision-making. For the time being, although it is known to many, it is not used on a regular basis.

Qualitative methods

Within this group would be located all the methods based on indicators that ideally should cover each and every aspect related to the value of assets: technological, market, legal, etc.

Generally, this criterion is implemented by means of a form in which assets are rated on a scale (e.g. from 1 to 10) in comparison with the relevant indicators.

Mixed or goodwill-based methods

This method is mainly based on the company’s goodwill or dividends. These intangible elements imply a high value for the company, as well as its social location, its clientele or the profits attributed to it.

 

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Who is qualified to appraise your company?

There is no single person who can perform this process. In fact, it usually involves several parties who are usually involved with the company. Depending on the type of assessment that needs to be done, trainings are usually done by:

  • Funds and investors.

  • Acquisition or merger advisors.

  • Buyers.

  • Business managers and executives.

  • Partners, shareholders or owners.

Earlier, we mentioned that the valuers should not be involved with the company, as is the case of the owners and partners. However, this changes depending on the valuation method that is deemed relevant to apply and then, depending on the conclusion reached by each party, it will be compared with the objective opinion.

 

As you have seen, there are many ways in which the value of a company can be calculated. It is important for you to know that, depending on the operation you want to carry out, the valuation will vary. All the analyses that are made will be part of the same reality and the set of all of them are the global guide of the situation of your business.

Do you want to know the value of a company, particularly yours? Our managers at TAS Consulting are experts in dealing with this type of situation. If you are looking for a complete consultancy, do not hesitate to schedule an appointment with us. Contact us through our website or our email tasconsultoria@tas-sl.es, we will gladly assist you.

 

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