Mergers and acquisitions are a norm in the corporate world. Investors are always looking for viable small and medium-sized businesses to acquire while competitors are always considering the option of merging to create a formidable force in the industry. Before these transactions can be executed, however, a business or company must first be valued. The appraisal will inform all the parties involved in the transaction about the actual market value of an entity. Buyers can use this value to negotiate with the seller for a discount. A seller, on the other hand, will want to know what their business is worth to ensure they can set the right price. While several business valuation methods exist, the following is a list of the most conventional valuation methodologies in M&A:
- Discounted Cash Flow
This is one of the most popular methods of estimating the current market value of a company. It looks at the current and future cashflows of a company. The method focuses on the intrinsic value of a company by forecasting the unlevered free cash flow of a company within the next 5-10 years. The projected cash flow is then discounted taking into consideration the company’s current cost of capital. A lot of assumptions are usually made when building the financial model on an excel sheet. It is a detailed and complex analysis of a company’s market valuation, and can only be used by financial analysts.
- Comparative Company Analysis
One of the most effective methods of valuing a company is comparing the company’s stock to other companies with similar metrics. In this method, the price-to-earnings ratio (P/E), EBITDA, EV, and other multiples are considered. For instance, if the shares of a similar-sized company are trading at 20 times the P/E ratio, your company may be valued at $50.00 per share if the earnings per share stood at $2.50. However, some assumptions have to be made about the two companies. For starters, it is assumed that the two companies have similar risk/reward characteristics.
- Precedent Transactions
It may be difficult to value a company that does not have any earnings or significant assets. Software companies are a good example. A company may be considered valuable but its value cannot be quantified using the traditional valuation methods. In such cases, precedent transactions may come in handy. In this method, we consider the value of similar companies that have been sold recently. The value of the company in question may be a little bit higher than the preceding transactions.
- Liquidation Value
When planning to buy a business that is not doing well or is just about to wind up, the liquidation value can be considered. With this method, all the assets of the company both tangible and intangible are valued. The total liabilities are also listed. What remains after the assets are liquidated in the open market, and liabilities paid, is deemed to be the liquidation value of a company.
- Market Cap
If a company has 100,000 shares and one share has recently been sold at $5.50, the market capitalization of the company can be taken to be exactly $550,000. However, other factors may affect pricing. For instance, if the company has recently announced a significant increase in earnings and profits, the price per share might have increased. When using the market capitalization method to value a company, timing is crucial. The method should be used when the market is bullish and the company is performing exceptionally.
MergersCorp M&A International is an experienced M&A corporate advisory firm with a global reach. The company has concluded dozens of mergers and acquisitions in over 40 countries around the world. The company has experts in a variety of industries to advise clients when they want to buy or sell a company.
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