COMPANY VALUATION: How to determine its true value?

Knowing the real value of a company is an essential step in any M&A transaction. In this article, we explain what company valuation consists of, what it is used for, and which methods are most commonly used in practice.

 

What is it and what is it for?

Company valuation is the process by which the real economic value of a company is determined, taking into account both qualitative and quantitative criteria.

This analysis is essential for the parties involved to make informed decisions regarding the price of a transaction and the viability of the agreement.

 

Most commonly used company valuation methods in M&A transactions

There are different methods for valuing a company, and each has its advantages, limitations, and degrees of applicability depending on the type of company, its size, sector, and availability of information.

It should be noted that no valuation method is definitive and what ultimately prevails in a negotiation is the logic and willingness of each party to reach an agreement that is fair to both.

Below are descriptions of two of the most commonly used methods in M&A processes: the discounted cash flow (DCF) model and valuation by multiples.

 

1. DCF Model (Discounted Cash Flow)

It consists of projecting the future cash flows that the company will generate over a given period. These flows are discounted to their present value by applying a discount rate that reflects the risk and cost of capital over time. The present value of the company is obtained by adding up all these discounted flows.

• PROS: It allows for an accurate assessment of the company's future potential, considering the associated risk and adjusting for the time value of money.
• CONS: Its accuracy depends on projections and assumptions, which can lead to uncertainty and requires detailed analysis. In the SME market, this information is often unavailable, and small variations in assumptions can significantly alter the valuation.

 

2. Valuation by multiples

A multiple is applied to a financial indicator, such as sales, contribution margin, EBITDA, EBIT, etc. The multiple used varies depending on factors such as size, growth prospects and the sector in which the company operates. The most commonly used financial indicator is EBITDA, as it reflects gross operating profitability and eliminates the effect of factors such as depreciation, interest and taxes.

• PROS: It allows you to quickly compare the value of a company with that of its competitors, isolating the operating profitability from the financial and tax structure of each company.
• CONS: Does not consider future risks and must be supplemented with additional financial metrics (CapEx, working capital, etc.). Requires comparable analyses, in many cases private, which need to be specific to each sector.

 

Customised company valuations for the agri-food sector

At TAE Europe, we specialise in M&A transactions within the food, beverage and agriculture sector, backed by our in-depth knowledge of the market.

When performing a valuation, we apply specific criteria for each sub-sector, enabling us to produce accurate and personalised valuations tailored to the particular characteristics of each business. In this way, we combine rigorous financial analysis with a solid understanding of the sector to obtain results that reflect the reality of each company.