When it comes to company valuation methods, everyone looks first at the classics: sales, EBITDA, cash flow. But some balance sheet items, though less visible, can have a serious impact on a company's real value. Overlooked, underestimated, sometimes even ignored, they can be goldmines... or time bombs.
Let's take a look at a few examples of accounting details that can swing a company's valuation.
1. Deferred income: the illusion of profitability
Deferred income is a bit like selling concert tickets before the show has actually taken place. The money has been received, but the performance has not yet taken place.
The problem? Some unscrupulous valuers forget to take this into account and artificially inflate profitability. And yet, if a company has €500,000 in PCA, it will still have to provide services without collecting a single extra euro.
Impact on valuation methods: A distorted EBITDA, and therefore a potential overestimation of 10 to 20% on the enterprise value if this item is significant. Moreover, if the PCAs have been cashed in, the structure's net financial debt will be distorted!
2. Trade receivables: the cash that may never arrive
Sales are good. Cash received is better. And here, watch out for trade receivables.
Check it out:
- Age of receivables: If a receivable is more than 6 months old, it's often a bad debt because it can't be collected.
- Sector overdue rate: In the building and civil engineering sector, payment terms are often in excess of 80 days, whereas in other sectors they are 45 days maximum.
- Provisions for doubtful debts: A company that has none... suspect.
Impact on valuation methods: artificially inflated WCR (working capital requirement) and overestimated future cash flow. A detailed analysis is required, or these elements can be included in the ALM for an acquisition, with a simple rule enabling the ALM to be triggered on this point.
3. Stocks: treasure or dead weight?
Companies with stock like to value it as much as possible... but stock is not cash.
Keep an eye on :
- Obsolescence: Computer stock valued at purchase price even though it dates back to 2019? It's a museum, not an asset.
- Seasonality: A stock of sun creams in December isn't worth much.
- Valuation method: FIFO (First In, First Out), LIFO (Last In, First Out)? Depending on the method used, the valuation may be inflated or undervalued.
Impact on valuation: If a €2 million inventory has to be depreciated by 20%, that's €400,000 less in enterprise value.
4. Hidden provisions: the ghosts of the balance sheet
Some companies, out of prudence (or for clever accounting reasons), set aside provisions for future expenses. A good idea... unless they're too cautious.
Classic cases :
- Provisions for litigation: They do exist, but if they are overestimated, they unnecessarily drag down the valuation. This is often where the charm of French justice... comes into play: Mr. Lawyer, could you tell me my chances of winning or losing this case and the possible financial impact...
- Social commitments: a company with a pension plan that is not properly funded can have an accounting time bomb. The classic case of the assistant who has been with the manager since the beginning of the adventure, 25 years ago..... and will leave after the support period.
Impact on valuation: An incorrectly valued provision can distort the value by 5 to 10%, for better or worse.
5. Financial debts: what the company really owes
When we think of debt, we often think of bank loans. But there are other, less obvious forms of debt to watch out for.
Check it out:
- Payables to associates
- Leasing and off-balance sheet commitments: Expensive leasing can reduce future profitability.
- Hidden supplier debt: Some managers delay payments to present a flattering cash position. We can also sometimes have URSAFF payment plans, etc...
Impact on valuation methods: A company with €1.5 million in trade payables that extends its payment terms may see its valuation adjusted by 10% to 15%.
Conclusion: valuation is not done on a table corner
Valuing a company isn't just about multiplying EBITDA by a standard multiple. It's a surgical analysis where often overlooked items can make the difference between a good deal and a financial disaster.
The moral? Always dig into the details of the balance sheet. Because sometimes, the biggest stakes are hidden in the smallest lines.
If you would like to find out more or have your company assessed, please contact our consultants:
