Valuing your company can prove to be a useful step in various situations, including:
- You wish to sell your business soon and would like to obtain an estimate of its value before starting the sale process;
- you wish to bring in an investor (professional or not) into your capital in order to make investments for the development of your company;
- You are in conflict with other shareholders of your company and need a fairness opinion;
- you wish to carry out a contribution-sale transaction;
- you wish to implement share subscription warrants or implement a share allocation policy for your employees;
- you need a valuation in the context of an inheritance or succession, etc.
“The Financial Markets Authority (AMF) generally uses 3 valuation methods, from which many variations can be constructed, to determine a company value close to the amount at which a short-term transaction involving 100% of the capital should be carried out,” explains Antoine Vintzel, founder of the firm Saksun Partners, specializing in company valuations and support in balance sheet operations for French SMEs.
He explains: “Each of them corresponds to a moment in the life of a society: past, present and future and, depending on the state of development of the society, a different weighting must be applied to these different methods.”
Valuing the present: the comparables method
The comparable companies method is based on comparing the company with companies having similar characteristics (strategic business area, size, maturity, workforce, etc.).
Comparative research can be carried out either on the evolution of the stock market values of companies in the same sector of activity, or on the basis of recent transactions of unlisted companies.
- The comparable companies method relies on the market valuations of listed companies whose market capitalization provides a snapshot of their equity. By adding net financial debt, the enterprise value is obtained. Thus, for each comparable company, it is possible to calculate the value of its economic assets at the last known stock market price. Applying the method involves creating a sample of listed groups whose activities are as comparable as possible to those of the company being valued, and then applying the main average or median aggregates of the sample (generally a revenue multiple and an operating profitability multiple) to the aggregates of the company being valued.
- The external transactional comparables method relies on transaction data from companies operating in the same business area (or a related sector with the same business model) as the company being valued. It involves applying the same multiples observed in recent transactions to the financial data of the company being valued. However, the implementation of this method often encounters the following limitations: some transactions may represent a major strategic issue and therefore result in a high price reflecting significant market value, and financial information on these transactions is not always publicly available.
Valuing the future: the Discounted Cash Flow (DCF) method
The DCF method discounts the company’s future cash flows using a discount rate that takes into account the expectations of return on risk taken by shareholders, investors, and creditors.
This method values the company based on its ability to create value today, but also and especially tomorrow.
The strength of this approach lies in its ability to integrate multiple parameters such as the profitability requirements of third parties or the future prospects of the company over a defined time horizon.
It requires formalizing a Business Plan, generally for 3-4 years, that is as reliable as possible and based on assumptions that will be challenged by the external evaluator.
Valuing the past: the Net Asset Value (NAV) method
This method involves reassessing your company’s current balance sheet, as accounting entries do not always reflect the current market value of the various assets and liabilities that make up your balance sheet.
Generally, the main revaluations will take place at the asset level, and more particularly at the level of fixed assets: intangible fixed assets (software undervalued in your accounts, the goodwill of your company, a brand, or any other fixed asset related to intellectual property, etc.), tangible fixed assets (a fleet of machines fully depreciated in your accounts but which still has a market value, buildings, real estate, etc.) and possibly certain financial fixed assets (for example if you have a stake in another company on your balance sheet).
