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How to properly value your company before selling it?
Valuing a company is a key stage in the process of selling a company, which allows you to determine its real value and attract potential buyers. There are several popular valuation methods to help you get an objective estimate of the business value.
In this article, we will discuss three main approaches:
- comparative analysis,
- discounted cash flow method, and
- asset-based method.
1. Comparative analysis
Comparative analysis compares a company with other similar companies that have recently been sold or are listed on the stock exchange. This method takes into account indicators such as:
- Price/earnings ratio (P/E),
- Enterprise value/EBITDA ratio (EV/EBITDA),
- Enterprise value/sales ratio (EV/Sales).
The advantage of this method is its simplicity and the ability to obtain results quickly. However, its effectiveness depends on the availability of relevant comparative data and the similarity of the companies analyzed.
2. Discounted cash flow method (DCF)
The DCF method is based on the company's projected future cash flows, which are then discounted to their present value using an appropriate discount rate. This process involves several steps:
- Forecast of future revenues and costs,
- Calculating free cash flow (FCF),
- Determination of the discount rate (e.g. WACC),
- Calculation of the residual value of the company,
- Discounting of cash flows to present value.
This method is one of the most precise, but requires accurate financial data, financial forecasts and realistic assumptions about future growth.
3. Asset-based method
The asset-based method is based on the net asset value of a company, i.e. the difference between the value of its assets and liabilities. Depending on the level of detail of the valuation, the following can be used:
- Net book value - based on the company's balance sheet,
- replacement value – which determines the cost of replacing the assets,
- liquidation value – which indicates the amount that can be obtained in the event of the company's liquidation.
The asset-based method is particularly useful for companies with significant tangible assets, but it may not reflect the true value of a company based on its know-how or brand.
Choosing the right method
Each of the methods mentioned has its advantages and limitations. It is best to use a combination of several approaches to get the most accurate picture of the company's value. The final valuation should take into account the specifics of the industry, the financial condition of the company and the current market situation.
Company valuation is a key step in the sales process, so it is worth consulting with experts who will help you choose the right methodology and conduct a reliable analysis. This will allow the seller to achieve a satisfactory price and the buyer to be confident about the value of the investment.
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