Value of transactions (M&A)

What is value of my business and what do I get if I would sell it? If you want to take over(a business takeover) a company or want to sell your business, valuation is a very important part of the process. About value and valuation of companies persistent misunderstandings still exist . For instance, that the value is equal to the price paid for a (similar) business, or that the value would be equal to the equity or the value is equal to x-times earnings. However, many factors affect the determination of the economic value. When it comes to the determination of economic value the assignment includes analysis of the balance sheets, the current value of the property, future earnings forecast, an analysis of the internal and external business environment, the strengths and weaknesses resulting in the present value of all future cash flows associated with the company and determination of risks (discounted cash flow).

Value versus price

The price which is agreed between buyer and seller is the result of negotiation and does not necessarily coincides with the value. The price is dependent on supply and demand, or for example, access to finance. The optimal value is achieved when market demand and supply are in balance. But the market for acquisitions very rarely balances. This implies that the price and value of a company may differ considerably. From an economic point of view there will be a closing of a transaction if the value which the selling party attributes to the continuation of his business is lower than the value that the purchaser assigns to buy the company. At that time the transaction will create economic value for both the seller and the buyer?

Valuation versus appraisal price (multiple analysis)

For the purpose of the review of the valuation outcome we compare the results of the valuation on price formation in the market through multiple analysis. This is a relative value method. A distinction can be made between transaction multiples (based on price of purchase and sale transactions of comparable companies) and price multiples (based on the current price of similar sectors and / or companies on the exchanges. Testing takes place, for example by means of the following methods:

  • Precedent Transaction Analysis (“PTA”) = Transaction Multiple
  • Comparable Trading Analysis (“CTA”) as at the valuation date or on a 5-year rolling basis (“Rolling CTA”) = Price Multiple
  • Leveraged Buyout Analysis (“LBO”) = financial multiple

The view of economic subjects

The determination of the economic value is based on the economic theory of economic subjects which think rational and which aim to reach the maximum benefit, taking into account that the future expectations of the considering party is considered leading for the valuation. In this sense, the value for a strategic party (taking into account synergetic benefits for the strategic buyer) can deviate from the value for a financial party (stand-alone value for, for instance, private equity).

Request non-committal consultation

Valuation is tailor made advice. For this reason, you need experts to do the job. Value Drivers Business Valuators has all the knowledge and expertise required to provide adequate advice. For instance, there are several sworn Register Valuators working at Value Drivers Business Valuators. Together with you, we will walk through the process in step by step. First, we write a plan of action, next we will gather the necessary information, and after that we proceed to the research, analysis and valuation. There is no doubt that with the final reporting you will possess a profound and qualified report, which can be used as a starting point for a business transfer.

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