Company valuation method
The valuation of a company consists in calculating its financial value on the basis of its financial data, its activity, its organization and team...
The different methods of company valuation
In order to know the fair value of a company, several methods can be used. The 3 methods presented are the most used by experts:
- comparison: simply compare your company to others with a similar profile
- yield value: the company is considered as an investment in order to estimate its future profits
- asset value: will evaluate the company's assets
In what situations are valuation methods necessary?
During a business valuation, the valuation methods are systematically taken into account and must be detailed by the valuer to justify his approach. This evaluation is generally requested by the manager of the company under these conditions:
- the sale of his business or the purchase of
- a request for funding
- preparation of a succession
Which valuation method should be used?
There are mainly 3 valuation methods for a company: "comparison" (1), "performance value assessment" (2) and "asset value assessment" (3).
These methods have strengths and weaknesses and have different evaluation objectives.
1. Comparative or benchmarking valuation methods
Comparative valuation methods: definition
The comparative valuation method is used to compare your company to other structures with similar activities and performance and for which we know the value of the transaction.
These valuation methods are particularly well suited to business transfers where there is an unofficial quotation between professionals.
The comparative method will thus be based on business statistics that can be compiled in a scale, particularly for trades crafts or certain trades, but not only. but not only.
The most famous scale is contained in the practical file Evaluationpublished by Francis Lefebvre.
The comparative valuation method is the method that usually best reflects market trends.
Make an appointment with a XVAL consultant for a valuation of your company: https://xval.fr/
Advantages and disadvantages of comparative business valuation methods
The main advantage of the comparative method is its simplicity but it can also become its weakness. To overcome this, it is interesting to complement it with other analyses.
Indeed, with the application of a comparative valuation method, one obtains a range that is often too wide and requires the use of other calculation methods.
As mentioned above, the comparative method is most often used for the valuation of businesses, mainly in the context of a transfer of activity.
2. Business valuation methods based on the value of performance or profitability
Valuation methods based on yield or profitability value: definition
The yield valuation methods allow toevaluate the future capacity of a company to generate profits. In this approach, the risk of non-realisation of profits is also taken into account.
In the context of a transfer, this method can be used on both sides of the transaction: by the transferor, who bases himself on the profitability history, and by the transferee, who can project an expected profitability.
Make an appointment with a XVAL consultant for a valuation: https://xval.fr/
Advantages and disadvantages of profitability-based valuation methods
The main advantage of this type of method is that it bases the calculation of the company's value on profitability concrete.
The disadvantages? These methods can be a source ofs of disagreement and generate rough negotiations: thehe projection of benefits, of course, is often a subject of debate.
This type of valuation method is often used when the buyer has to borrow money in order to take over the company.
In this context, he hopes that the profits of the structure will allow him to repay his creditors.
3. The patrimonial methods of company valuation
Heritage valuation methods: definition
Asset valuation methods consist in calculating the value of the company by evaluating its assets (what the structure owns) and then subtracting the amount of its debts.
The result of this calculation is the company's net assets or net position.
This method rarely leads to a perfectly fair economic value. For example, a company that is loss-making and has no projects can be valued positively by the asset method. On the other hand, a company with a high profitability or with projects in progress may be valued unfavorably according to this method.
But then, what is the use of the methods of heritage valuation?
These methods are useful if you want to calculate the replacement or liquidation value of the business. For example, a transferor wishing to stop his activity and sell the assets at retail may use asset valuation methods.
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Advantages and disadvantages of the patrimonial valuation method
The asset valuation method is above all a good way tothe price of a transfer based on a reference that is difficult to contest.
The disadvantage, as we have mentioned, lies mainly in the fact that these methods do not take into account the notion of profitability in the calculation of the company's value...
The patrimonial method is mainly used tovalue medium-sized enterprises (SMEs) with stable earnings.
However, an evaluation based on cost-effectiveness (2) is still required.
Who should I contact to proceed with the valuation of my company?
There is no perfect way to value a company.
For this reason, quality assessments are often the result of a combination of several preliminary evaluations (patrimonial, profitability...).
This process can be very complex, which is why it is often necessary to call upon an external and neutral professional who will be able to give you the benefit of his or her expertise and will accompany you throughout this project.
Indeed, valuation tools must be handled with care in order to guarantee a precise valuation in line with market standards.
Furthermore, let's not forget that a company owes a great deal to the personality of its leader, which can greatly influence its value. Without him or her, how can we know if the company will continue to generate profits or if the morale of the teams will remain good?
The valuation of a company therefore incorporates a subjective element sometimes very important, but also difficult to quantify concretely.
Conclusion: 4 elements to take into account when valuing a company
Regardless of the methods used to evaluate your company, there are 4 criteria which are found transversally in each of the 3 methods:
- The objective value of the company, evaluated as faithfully as possible by the patrimonial method;
- Subjective elements: the emotional bond that may bind the seller and his company, or the desire to get rid of the structure as quickly as possible...
- Quality of the negotiation process;
- Finally, the good health of the company: good returns correspond to a better ability to repay the loan taken out for the purchase.
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