Last modified:Friday 28 July 2017
Throughout the life of the company, the directors, shareholders and, finally, all economic stakeholders who gravitate towards the company (banks, members of staff, competitors, etc.) ask themselves the following question: "How much is the company worth?”
Planning to sell the company certainly constitutes one of the key moments when the determination of the company value is crucial and essential.
For many companies, it will not be possible to refer to a market value. In such cases, the evaluation operation will often be emotional because it may be close to the seller's heart.
Even more generally, the context in which the evaluation takes place will influence the evaluation: selling the company to family members or third parties may justify significant differences in the determination of the company's value. And even if there is agreement on the methods to use, the characteristics of the different parties and the quantification of their expectations may lead to as many different values.
The evaluation of the company is a process which can be summarised in three phases:
a first phase... during which it is essential to identify the exact context in which the operation takes place. It is important to understand this context because it will be used to identify the appropriate evaluation methods and it can itself influence certain parameters of the evaluation.
a second phase ... during which it is a good idea to analyse and determine the substantial value (or asset value, or current value) as well as the return value (related to the company's capacity to generate future earnings. This analysis phase may vary in its level of detail: it must be suitable for determining the influence of internal factors (business sector, location, operational, human, and financial resources available…) and external factors (economic situation, interest rates, inflation...) on the evaluation.
a third phase... where the methods are actually implemented: the parameters such as discount rates and evaluation information must be determined in detail. Relative to the calculations carried out, a sensitivity test may be carried out to assess the impact of certain hypotheses or positions taken by the assessor. Finally, this process will result in the determination of a value range based on which the price negotiation can take place.
In practice, the most frequently used methods for unlisted companies are:
The adjusted net asset method
This method is used to assess a company's asset value. As a result, the adjusted net asset value is the amount that a third party must invest to exercise an activity identical to that of the company in question.
Methods based on the goodwill value
In this method, the updated "goodwill" is added to the adjusted net asset to determine the company's value. The goodwill represents all intangible assets (patents, trademarks, customer files, exclusive contracts, niches in the market, economic rent, etc. These values don't often appear on the balance sheet, but are intrinsically included in the company's value.
Methods based on discounted cash flows
This method, based on the company's expected profitability, is closely linked to the analysis of an investment opportunity based on the future cash flows which will be generated by the investment in question.
During an evaluation, it is essential to show some discipline and pay particular attention to the choice of evaluation techniques, the quality of the data, and the interpretation of the results.
If the various methods applied result in very different values, you need to try to determine the reason for these differences and, if necessary, question the technique(s) used and/or the data quality.
Finally, be aware that the sale price may be influenced by the type of transaction in question; namely, the sale of assets or the sale of shares. In cases where the interests of the buyer and seller are incompatible in terms of the choice of transaction type, these operations need to be treated with caution.
In most cases, recourse to a professional, at an appropriate time, is highly recommended.