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The valuation of a company depends on many subjective factors. Among these elements, we find in particular the purpose of the operation: donation, succession, family transfer or transfer of the business to a third party.
The Stemming of the value
Value also stems from the attractiveness of the business. It depends on several elements such as: the location, the recurrence of the activity, the business of the company, the dispersion of the clientele, dependence on the manager or collaborators, the financial structure of the company, etc.
The methods
There are a number of main valuation method families that can provide a “financial justification” for a company value. They are based on different approaches:
- Own funds of the company: the patrimonial method
- Past profitability: performance methods and EBIT.
- Future cash flows: the DCF (Discounted Cash-Flow) method.
- But there is another method, simple and pragmatic, to value a company: the empirical method.
The purpose of this method is to determine the financial value of the business by answering the following question: “How should the buyer finance the takeover of this business? “. This consists of valuing the company by the sum of the various possible sources of financing, namely: the contribution of the buyer, the credit lent to the banks and the distributable cash of the target. Then, you have to deduct the acquisition costs paid by the buyer to determine the value of the company. For getting the Getting The Best price For Your Business you can have the perfect options now.
In order to understand the mechanism of this valuation method, we will take the following example:
- Company in IT outsourcing existing for 10 years
- Company with a well-structured team of 15 employees
Activity and profitability of the stable company with a turnover of € 2 million, current profit before tax of € 100 thousand and a net result of € 77 thousand (no exceptional result);
The manager has a function of manager and is remunerated, all charges included, 150 K € / year;
The company has € 400,000 in equity and € 300,000 in cash on the balance sheet. This cash is relatively stable all year round.
Before realizing the valuation of this company, it is first necessary to determine its restated net profit in order to assess its real profitability. The elements to be corrected can be of different natures such as the remuneration of the manager, the policy of depreciation, the policy of financing, the loads or exceptional products, etc.
Application: In our case, we can consider as normative an executive remuneration of the order of 60 K € annual (+ 30 K € of charges TNS) on this type of structure. As a result we get the following restated net result:
The contribution of the buyer
Overall, it is found that an SME-SMI buyer brings on average between one and three years of net profit adjusted for the target according to the attractiveness of the company.