Selling a Company: Discover How to Correctly Value Your Business

Selling a Company: How to Correctly Value Your Business

Are you thinking about selling your company? Great idea! The first step, and perhaps the most delicate, is to establish its market value. This is not an operation to be improvised, but a process that requires method, attention to detail, and a thorough evaluation.

In this article, we will guide you through the fundamental steps to define the value of your business accurately and professionally. Get ready to enter the world of business valuation!

The 5 Key Steps to Value Your Company

1. Gather all Financial and Business Documentation

   Start with the archive! Retrieve all relevant financial and business documents, ideally from the last 4 years. We're talking about:

   • Income Statement

   • Balance Sheet

   • Cash Flow Statement

   • Tax Returns

   These documents will give you a clear and complete view of your company's financial health. Without these, it's like navigating by sight!

2. Calculate an Initial Estimate of Value

   Business valuation is a complex process and can be approached with different methods. To get an initial estimate, I recommend using at least three approaches:

   • Method of Multiples

   • Discounted Cash Flow (DCF)

   • Method of Comparables

   Method of Multiples

   It is one of the most popular methods and is based on the application of market multiples to your company's financial data. These multiples vary based on the sector, company size, and historical period. The most used financial data are Revenues (Turnover) and Gross Operating Margin (GOM, or EBITDA).

   • Revenue Multiple: Multiply annual revenues by the appropriate multiple. For example, if your company has a turnover of €500,000 and the revenue multiple for your sector is 2x, the estimated value is €1 million.

   • EBITDA Multiple: Multiply the Gross Operating Margin (EBITDA) by the corresponding multiple. If the EBITDA is €500,000 and the multiple is 7x, the estimated value is €3.5 million.

   Here are some indicative multiples for different sectors:

   EBITDA Multiple:

   • Software / IT Services: 9

   • Manufacturing industry: 7

   • Services: 8

   • Food service activities: 6.5

   • Commerce: 5.5

   • Crafts/Construction: 4.5

   Revenue Multiple:

   • Software / IT Services: 1.5

   • Manufacturing industry: 1

   • Services: 81.1

   • Food service activities: 0.9

   • Commerce: 0.7

   • Crafts/Construction: 0.6

   Discounted Cash Flow (DCF)

   The DCF method is based on the forecast of the company's future cash flows. It is more complex, but also more accurate if done correctly.

   • Forecast of Future Cash Flows: Estimate the cash flows that the company will generate in the future, based on financial forecasts, growth rates, expenses, and planned investments.

   • Calculation of Net Present Value (NPV): "Discount" future cash flows to their present value using an appropriate discount rate, which reflects the risk of the investment.

   • Determination of Present Value: The sum of the present values of the cash flows represents the value of the company.

   This method is based on the idea that the value of a company is equal to the present value of its future cash flows.

   Method of Comparables

   This method compares your company with similar companies that have been sold recently or are listed on the stock exchange. In practice:

   • Collection of Comparable Data: Collect financial and operational data of similar companies to determine their market values or their multiples.

   • Application of Comparable Multiples: Apply the multiples obtained from comparable companies to your company to estimate its value.

   The basic assumption is that similar companies will have similar valuations. The difficulty lies in finding truly comparable companies!

   Each method has its pros and cons. My advice? Use more than one to get a more complete picture and compare the results. If significant differences emerge, investigate thoroughly to understand why.

3. Evaluate Assets and Liabilities: "Equity" Approach

   Carefully analyze all the assets of your company:

   • Inventory: Determine the market value of your warehouse, taking into account obsolescence and stock levels.

   • Equipment and Capital Goods: Evaluate machinery and equipment, considering age, state of maintenance, and market value. An appraisal may be needed.

   • Properties and Real Estate: If you own land or buildings, have their market value estimated by a professional.

   • Intangible Assets: Don't forget trademarks, patents, copyrights, and your loyal customer base! They can be worth a lot.

   Then, subtract all liabilities and debts (short and long term, pension obligations, leases, etc.).

   The result is the net asset value, which represents the "book" value of the company. Remember, however, that this value may not fully reflect the market value, because it does not consider the ability to generate future profits. Combine this method with those seen before to have a more complete picture.

4. Consult a Team of Experts

   Business valuation is a complex process