There are various methodologies and valuation models with which value of a company can be determined. Relevant are especially the type of company and its current situation.
The mathematically cleanest approach is to determine the value using expected future cash flows, which are discounted to the present value with an interest rate. The starting point for this is the sustainable earnings or cash flow figures adjusted for specific or temporary special effects.
For simplification purposes, in practive a comparative valuation is often used as an alternative: Earnings figures that are close to cash flow, such as EBITDA, EBIT or EBITDA minus CapEx, are multiplied by a multiplier. The multiplier is derived from other transactions that have taken place in the relevant sector or comparable business size. By employing the multiple used in transactions of comparable companies the value derived can be taken as an orientation for an achievable enterprise value.
However, it needs to be considered that the valuation of a target company is carried out from the perspective of a buyer, who will ask the following questions regarding the development of the future cash flow and earnings power of the target in question:
- What are the growth prospects within the market for the target company?
- What risks need to be considered in the business and financial plan?
- How high is the need for replacement and growth investments?
- What are the earnings and cash flow potentials for the company?
- What synergies could be achieved through a merger?
- What is the size of the addressable market for a merged company?
- What would it cost to build up a comparable company - and what would be the barriers to market entry in this case?
NETWORK will examine and prepare these questions in the business and financial plan while getting the target company ready for a a transaction at a realistic company valuation.