Tag Archives: Company Valuation New 2024

Diferencia entre precio y valor

What is the difference between the price and value of a company in a sale and purchase process?

Have you ever wondered what the difference is between a company’s price and value? Most people use the value and price of the term interchangeably, but in the sale of a company, the difference is of paramount importance.

It is not uncommon for you to have used the word value when you meant price and vice versa. Value and price are very different economic concepts that must be distinguished, especially in corporate transactions.

In these processes, the final price is usually only known on the day of the sale signing; until then, the amount depends on the negotiation.

Value and price are closely related. Here we tell you how these two concepts influence each other and how you can distinguish between them.

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The value of a company

From time to time, we find, in the news about mergers and acquisitions, that a particular company “has been sold for 10 million euros, which has meant a valuation of 6 times its EBITDA”.

The question then arises: “The price is 10 million. So, the value of the company was 10 million?”. The financial answer to the question of how much a company is worth must be based on these two concepts.

Technically, the price of a company is the amount for which two independent parties agree to carry out a sale and purchase transaction, which is fixed during the negotiation process.

Value is a more subtle concept. In a sense, it is the amount that an investor should pay for a company, and this figure is related to the liquidity that the company would be able to generate in the future.

From a certain point of view, value can be seen as a wholly subjective and emotional concept. In reality, entrepreneurs often attribute economic and material value to their companies based on criteria of emotional attachment, loyalty and faith.

Nothing could be further from the truth: value is a quantifiable concept. The method used by business analysts and traders to quantify the value of a company into a number is called valuation.

Valuation is the first and essential step in agreeing on a sales price.

There are various valuation methods. Depending on the method used, the valuation may yield different results on the value of the company. An experienced advisor can select the correct one(s) and can set a value range that minimises the possible margin of error. On the other hand, in the context of a business sale and purchase negotiation, value can be understood as the value that each party assigns to the company, according to its interests. It is therefore a monetary measure of the degree of utility that the company will bring to the buyer of the company.

The price

For all these reasons, and based on valuation, we approach the price. The price is the amount to be paid and will be subject to negotiation due to differences in the perception of the value of the parties involved and their respective interests.

The price is the tangible value achieved at a given point in time through the sale of a company. It depends, in addition to the company’s valuation per se, on the supply and demand at that time.

The price is the result of the competing interests and aspirations of the buyer and seller.

In addition, it will be influenced by entirely subjective factors, such as the negotiating skills of the buyer and seller. The more skilful the one with the better arguments will be able to bring the amount closer to their interests.

In short, the price of a business is the amount agreed, upon after a negotiation process, by two parties to a sale and purchase transaction. The price is determined by:

  • The result of the valuation methods performed by the seller and the buyer.
  • The market supply and demand at the time of the negotiation.
  • The agreement between the interests and aspirations of the buyer and seller after the negotiation.
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The role of valuation in the path to price

As we have seen, the seller and buyer will assign a value and a price to the company according to their respective interests, depending on the valuation methods.

The figures derived from the valuation methods are directly related to the elements of the company, such as its liquidity and ability to generate future income, among others.

This difference in results is because it is difficult to determine the value of a company, as valuation is not an exact science. The result will vary depending on the method used, such as liquids, which take the form of the container that holds them.

There are different valuation methods, and each advisor will choose the one they consider most appropriate to the reality of the company being valued:

Comparable Company Method (CCA)

This is when you evaluate your company’s value by utilising the variables that companies similar to yours have. Use this to determine their value, like sector, size, growth rate, margins, and how profitable they are.

Comparable Transaction Method (CTA)

This method involves analysing and estimating your company’s value by comparing prices paid in transactions for similar companies.

Discounted Cash Flow (DCF)

Using this appraisal method, you will determine the company’s value based on its future cash flows. You apply a discount rate to each year’s projection to calculate the result according to the present value of money.

Free Cash Flow (FCF)

Contrary to DCF, a company’s value is based on the net profit. Meaning the amount, the company generates after accounting for the costs of operations and maintenance of capital assets.

Leveraged buyout (LBO)

This projects its value by analysing the contributions made by the alternative sources to the net Internal Rate of Return.

Breakup Analysis

With this, you look at your lines of business, which means that its components determine your company’s value.

If you are interested in learning about all these methods in detail, you may be interested in reading our article on business valuation methods:

When selling a company, a professional valuation is highly recommended. It should be carried out with two objectives in mind:

  • Understand the company’s value range.
  • Provide economic and business arguments to underpin the negotiation.

Because of all the factors mentioned above, it should be borne in mind that, strictly speaking, a valuation will result, not in a value, but in what we call a “value range”.

It is possible to estimate how much a company is worth. Still, because of all the elements involved and the subjective values we have discussed, it is unrealistic to think that you can know its value exactly.

True valuation professionals will always talk about a range of values. From there, they work to translate it into an advantageous price during negotiation.

Negotiation is the sale phase, where the price of the deal and its outcome are at stake. Knowing how to avoid the most common mistakes in this phase guarantees the transaction’s success.  If you are interested in knowing what mistakes to avoid and how to avoid them, do not hesitate to download the e-book we have created to help you: Errors in the sale of a company. Part 2: The negotiation.

Maximising the value of the company to obtain the best price

As we have said, the valuation result will give a “value range”. At this point, the question is: “How can this value range be translated into an advantageous price when buying and selling a company?”.

First, we will have to find the point in this range that can provide us with an accurate idea that brings us closer to the price we want to achieve.

You may be interested in: Why is a company valuation important?

Each advisor will prefer and recommend a valuation method, but there are several methods to get a clear answer. There are different strategies. The football field valuation strategy can be used. This method compares the various results provided by other valuation methods and averages the value of the company through the use of different types of valuation.

Negotiation will be the key to transforming the best valuation into the best possible price.

But to get to this point, the company must be adequately prepared, free of conflicts and all areas of the company ready to put on its best face, provide the best valuation result and translate this into the most advantageous price.

Preparation will be the key to your success. At ONEtoONE, we have prepared a checklist to help you get all the aspects under control that will impact your company’s value and help you get the best price.

If you are interested in considering the sale of your company and need professional advice, please contact us or fill in the form below:

Benefits of the valuation football field

As we plan the sale of our business, it is essential to calculate its value, so we understand what price we should expect and know the scope of our area of play when the time for negotiation comes.

Using multiple valuation methods and comparing the results is what we call the valuation football field. The combination of numerous methods of valuation is a helpful tool that gives us an overview of what your company could be worth, depending on the perspective of each method. This will come in handy when negotiating with your potential buyer and getting the best possible price for your company.

Valuating a company is not an exact science

It is difficult to pinpoint the actual value of a company. The football-field-style graphic below in the form of a floating bar chart can help summarise a company’s various ranges of value determined by several methods of appraisal and observe the possibilities when negotiating.

For example, imagine your company’s current price is 350M, but you want to know its value. When applying the valuation football field, we notice that, depending on the valuation method, the value ranges show how high can the price for your company be, letting you know how much potential leeway you’ll have when negotiating with the buyer.

This graphic shows that each valuation method has resulted in a different value range, with the highest at lowest being 50M above the current price and a 500M ceiling. This means that you could get as much as 500M for your company, representing 150M over its current price.

You may be interested in How to value a company.

How can the valuation football field work in my favour?

During the valuation of your company, you are estimating its value. You have available a plethora of methods that can determine a value range of what your company may be worth. Using only one of these methods may provide a narrow view of what your company is worth, like a horse wearing blinders, utterly unaware of its surroundings.

It’s like negotiating based on one valuation method and then realising that you could’ve arranged almost 25% more for your company if you had used the valuation field. Imagine you’re a general; would you rather have intel informing you about one of your enemy’s strategies or as many strategies as possible? This is what the valuation football field provides, as much conceivable value ranges as possible.

In the end, these are all assumptions; as we’ve stated before, science is not exact. The benefit of the valuation football field is that it helps you reduce the margin of error when valuating your company and help you in the decision-making when selecting the best valuation method to get the best possible price for the sale.

What valuation methods can I apply to the valuation football field?

Your valuation football field’s size will depend on how meticulous you want to be in your overview of the different valuation methods. Each method’s result may vary from one another.

Comparable Company Method (CCA)

This is when you evaluate your company’s value by utilising the variables that companies similar to yours have. Use this to determine their value, like sector, size, growth rate, margins, and how profitable they are.

Comparable Transaction Method (CTA)

This method involves analysing and estimating your company’s value by comparing prices paid in transactions for similar companies.

Discounted Cash Flow (DFC)

Using this method of appraisal you will determine the company’s value based on its future cash flows. You apply a discount rate to each year’s projection to calculate the result according to the present value of money.

For example, $1 today is worth $1, but a projected cash flow. In five years of $5 with a discount rate of 0.683 tells us that those $5 today are worth $3.4.

Free Cash Flow (FCF)

Contrary to DCF, this is the value of a company based on the net profit. Meaning the amount the company generates after accounting for the costs of operations and maintenance of capital assets.

For example, if a company has a cash flow of $10 and spends $3.5 to stay in business. The remaining $6.5 is free to be reinvested.

Leveraged buyout (LBO)

This projects its value by analysing the contributions made by the alternative sources to the net Internal Rate of Return.

Breakup Analysis (BA)

With this you look at your lines of business, which means that its components’ determine your company’s value.

You may be interested in: Why is a company valuation important?

Make sure you get the best price for your company

Changing how much you get for your company will depend on the valuation process. A company that does not go through the preparation process is very likely doomed to fail. To avoid this, we’ve compiled in our e-book, “Errors during the sale of a company: The Preparation”, the most common mistakes entrepreneurs make when preparing their companies for sale.

Business valuation process

How to value a company? The business valuation process

Are you thinking of buying or selling a company? In the world of mergers and acquisitions, the business valuation process plays a fundamental role in determining the best estimate value for a business given all its counterparts. There are numerous advantages in understanding the intricacies of the valuation process that will be covered in this article, with the most obvious and prominent benefit being the understanding of the intrinsic value of a business – a vital milestone for its further sale.

It is essential to differentiate the value of a company from its price. The price is the specific value of a company materialized at the moment of the sale, depending on the supply and demand of the market at that moment. A value of a company is what every potential buyer gives a company depending on his profile and interests. It is the monetary measure of how useful the company is going to be for that person.

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Business valuation process

Importance of Conducting the Business Valuation process

Numerous business owners and entrepreneurs underestimate or simply are unaware of what the business valuation process entails and where it begins. This is a common scenario as the valuation process is a complex multistep process with different methods of approach. Independent of the valuation method you choose, valuating a company is a process where current value generating elements of the company are measured, as well as its competitive position within its sector and its future financial expectations. The type of valuation method used for analysis will then depend on factors such as the industry sector where the company operates, the size of the company, expected cash flow and the type of product or service it offers. For example, it is generally not advised to use the valuation method of comparable transactions if the sales volume or profits are 50% lower than that of the target company.

The valuation process is intrinsically technical, hence it is vitally important that whoever is conducting the valuation acquires financial knowledge. The valuator should also be aware of the company’s business model, its strategy, have a thorough understanding of the market where it operates, and the value-creating elements it acquires.

“ The main objective of the business valuation is to identify the key value-generating areas of the business.

The main objective of the valuation process is to identify the critical value-generating areas of the business. It is essential to consider which areas of your business may be of specific interest or value to the counterpart of the deal, as this will mostly determine the valuation results. For example, depending on the mindset and objectives of the investor, their interest may not be as much the profitability of the business, but perhaps the market share, strategic positioning, or a specialized area of the company’s value chain. The valuation result is then considered a significant estimation of a value range that will be a pivotal point in the negotiation of the final price paid for the deal. The valuation results are, therefore, important not only for identifying the key profit drivers of the business, but also setting a pinpoint for upcoming deal negotiations.

Factors to Consider

Before beginning the business valuation process, certain key factors must be taken into consideration. These include:

1. Profitability and risk.  Substantially all of the considerations made during the valuation fall into two categories: profitability and risk. This is because an investor looks at the opportunity cost of making the deal, so if there is a deal that is as profitable but induces less risk, it is more likely to be an investment option.

2. Personal reasons. Investors are people too! Emotions or non-economic factors may influence the decision-making process and hence the valuation process results. For example, if a seller is motivated to sell his business as fast as possible, the factor of time will be of priority over selling at fair value due to any personal or emotional reason that may be the case. It is, therefore, vital to understand what the bottom line reasoning for the deal is for both counterparts of the transaction.

3. Company surroundings affect value.  Companies are not islands. Their value depends on external factors and market forces. For example, if the stock market trades at multiple high volumes, your company will be worth more independent of its intrinsic value. Comparing to the value of the same company when the stock market is cool, even if your company is private and will remain to be so. This is because the stock market is an investment alternative for any investor. For example, if you are a construction company willing to invest, and you are offered a small-sized business industry for twice the value of the investment that could have been invested in a comparably larger sized firm’s shares on the stock market, the latter would have been the safest option for an investor. A company would have to have significant strategic value or potential for a buyer to consider it over the latter investment

4. Proper valuation requires valid information. Before considering performing a valuation and making future value predictions, the company’s past and present data must be accurate and correct. Only with this kind of data, and together with a strategic approach, a reliable estimation and valuable conclusions can be made. The more comprehensive and detailed the information you acquire about the business model, operations, and finances of the business before beginning the valuation, the better quality and precision the results will have.

Business valuation process

Types of business valuations

There are several methods of valuation used, depending on the objective of the assessment. However, the two most prominent methods used by analysts are the discount free cash flows method and the comparable transactions method:

1.Discounted Free Cash Flow method (DCF).

This method aims to determine the company’s ability to generate wealth, estimating the money that the owners could take home with them during the company’s lifespan. This method is used to convert these future cash flows into today’s currency, using a “discount rate” to reflect future money’s value discounted to today’s value, including the potential risk associated with the said generation of wealth. Essentially, this method provides insight into the future performance of the company and its ability to generate cash flow via the company’s resources.

The Discounted Free Cash Flow method requires analysis of the past, historical data. This will provide an insight into which factors lead to incurred costs and which generated revenues. Particular attention should also be paid to the factors that might affect future financial projections. The function should include revenues, costs, profits, investment plans, projected cash flow, and the economic structure of the company. This projection will act as a hypothesis about future financial data (balances, income statements, etc.).

Also, market analysis and competitive positioning analysis must be taken into consideration when this valuation method is performed. Understanding the effects of the Porter´s five forces (barriers to entry, threat of substitutes, negotiation power of buyer, negotiation power of the supplier and rivalry among competitors) will allow us to anticipate an increase in demand, measure the negotiating power of clients and suppliers, and understand the company’s vulnerability with respect to substitute products or the degree of price competitiveness within the sector. Furthermore, the analysis of your competitive positioning concerning the competitors operating in the same industry sector will increase or decrease the final value of the deal.

After these preliminary analyses are covered, the cash flow can be estimated – this will be an estimate of the future cash that a shareholder can take home without damaging the growth of the company, consequently for some time. This time is usually a range from 4-5 years. After that, estimating an accurate value can be extremely complicated. For this reason, buyers often calculate projections for a shorter time than sellers. Remember that the future cash flows must be discounted to a discount rate because the value of money today is not the same as it will be in the future.

2.Comparable transactions method. 

This method proposes a set of unique advantages. It’s faster, simpler, and more practical, although it may prove to be far from reality if conducted incorrectly. Because the analysis of this method is based on assumptions, it can potentially lead to future discrepancies between the seller and the buyer. This is due to the sellers often basing their price on the next value generation (or what the buyer will do with the company), which can lead to issues occurring during the breakdown of negotiations, as both parties have different expectations. For this reason, the discount cash flow method of valuation can prove to be more accurate.

It is highly advised not to compare companies based on sales volume, or profits lower than 50% of the target company, as the compared multiples become insignificant due to the vast difference between the company sizes. It’s also critically important to have a comprehensive database of past mergers and acquisitions and a thorough knowledge of the targeted sector along with all its participants.
In practice, most buyers choose the simplified valuation method based on EBITDA multiples. Valuating by multiples is a valid method only if the following criteria are reached:
If you have a wide range of similar companies
If the scope of companies or transactions is homogeneous
If the data is relevant and timely

Using the multiples can help you understand how much is being paid for companies like yours and can prove to be most useful during negotiations, especially if you have information about the history of transactions of the counterpart. A best practice would assume the application of both methods in complement to each other to ensure a higher precision of the estimated value.

Conclusions

Ultimately, the valuation process is a preliminary task to sell your company. It provides insight into the critical areas of a business, allowing owners to leverage the advantages and focus on improving vulnerabilities. Most importantly, this valuation provides an accurate estimation of the value range that both counterparts of the deal can use as the backbone of the deal negotiations. As discussed earlier, there is no ultimate formula or perfect valuation method for each situation. Still, by knowing the characteristics of the company and its corresponding environment, the best fit method can be chosen from a variety. It is an essential process to be able to maximize the price of the company backed by logical reasoning and numerical arguments.

“ The business valuation is an essential process to be able to maximize the price of the company backed by logical reasoning and numerical arguments.

Secondly, the valuation results act as a solid pivotal cornerstone of negotiations and don’t bind to the final price of the deal. It is a rarity to see both buyers and sellers agree on the set price immediately, so the valuation, in a sense, brings the two sides of expectations to a middle ground.

Thirdly, valid and comprehensive data is what makes a proper valuation. Therefore, before addressing any of the valuation methods, it is critically important to validate that the historical financial data available to the company is coherent and accurate. Only with valid data and a well-planned strategic approach can a reliable projection be made. Furthermore, the more complete and detailed the available information is, the more accurate and higher quality the valuation results will become.

We have learned that the most common valuation methods are the so-called discount free cash flow method and the comparable transactions method. The discount free cash flow method acquires its main advantage in its capacity to measure future results today. It is a more tedious and complex method, so the majority of investors and business owners, especially in the early stages, prefer to use the simpler alternative called comparable transactions method. Even though this method is simpler, it poses a set of research requirements, such as having access to a large enough database with past mergers and acquisitions, and preliminary knowledge of the industry sector.

Lastly, despite having several business valuation formulas, the key to the analysis resides in the team in charge of the operation. The company acting as an advisor of the deal must take into account future factors such as the projection of the company, the possibility of alliances with other companies, investment in R&D, changes in regulations, possible shifts in consumer habits, the internationalization of the company or the possibility of adapting the product or service to foreign markets, the possibility of exploiting new product ranges, and so on.

At ONEtoONE Corporate Finance we have created a podcast solving the most common doubts about our company valuation service.

If you still have any doubts about business valuation, now you can download ONEtoONE´s new free eBook “HOW TO VALUE A COMPANY? THREE MAIN BUSINESS VALUATION METHODS”. You will learn how to develop the most common methods used in the market and the key concepts that revolve around the business valuation process. Additionally, if you require any professional advice, do not hesitate to contact our team.

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Why is a Company Valuation Important?

Why is a Company Valuation Important?

It is time to materialize all the work you have done for an entire lifetime. How can you prove that is the right moment? The most important instrument to figure out this doubt is the company valuation.

Before explaining the reason why the valuation of a company is necessary inside a M&A process, it is important that you understand what it means. A company valuation, regardless the method you choose, is a process where the actual elements of the company are measured, as well as its competitive position within its sector and its future financial expectations.

Through this analysis, the elements that create value will be determined and it will be possible to specify a value range for the company. The value range will be an informed opinion of what the company in question could be worth.

You may be interested in: Benefits of football field valuation strategy

Why The Company Valuation is Necessary

Company valuation is a technical work. In order to value a company properly, an extensive financial knowledge is required. Simultaneously, you should first know in depth the company’s business model, the corporate strategy, and the market where they play in. And last, but not least, the factors that create value to the company. Looking beyond the traditional numerical due diligence parameters allows buyers to best calculate the true value of a company to them and sellers to justify a higher asking price.

If you are interested in learning more about factors crucial to a company’s sustained success and value, have a look at “THE VALUE OF NOTHING – HOW TO ACCURATELY CALCULATE A COMPANY’S VALUE”.

A company valuation is not an auditory, the analyst doesn’t question the given finances; nor is it an exhaustive diagnostic of all the company’s areas. From the beginning, the valuator will focus on critical areas that will show where the company’s value lies.

Sometimes, when I indicate a company’s intrinsic value range to the owner says: “for me it is more worthy”.

The above sentence holds a very deep meaning. For the owner, very often the founder of a company, who has dedicated his entire life to it, his company is ‘like a son’ and he generally has exaggerated expectations about its value. Because of this, I recommend that if you are the seller, you should put yourself in the shoes of the buyer; the buyer will see things in a different way and his first thought will be: “If I pay all of this for a company, how am I going to earn money?”

At ONEtoONE Corporate Finance we have created a podcast solving the most common doubts about our company valuation service.

A Strict Company Valuation Gives You Elements to Raise a Good Negotiation

It is very important to understand that the company valuation is an uncertain science, but if you want to sell your company it is essential to make a careful and strict valuation that gives you elements to raise a good negotiation with your potential buyers. Don’t get comfortable because the buyers will make their valuation too, so they can see how much money they are willing to pay for the company.

To avoid making common mistakes in the negotiation phase, do not hesitate to consult our e-book: Errors in the sale of the company, Part 2: The negotiation.

The final goal of a valuation is going to condition the methods you will prefer to use. The valuation method used will change depending on the recipient. The buyer is always going to use a method to demonstrate that the value of your company is lower, and the seller will use the method that shows that the value is higher.

When you value to negotiate this kind of transaction, any method is valid, as long as it sustains a rational negotiation. It is essential to value your company because it is your principal tool for the sale of your company.

If you consider the sale of your company, as well as correctly valuing your business, you will have to go through different stages to help you maximize the final price. Do you know which ones they are? Download the eBook “HOW TO MAXIMIZE THE PRICE OF YOUR COMPANY” where, in a simple way, we explain how to prepare the company for sale.

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