The evaluation of a company responds to a rigorous process based on a certain formalism that is more or less complex depending on the size of the company.
The final value of a company is only the conclusion of this process. Nevertheless, the principles and general methodology remain quite similar. Seven key steps can be identified for a successful assessment mission.
Step 1: Collect The Information
The first step is to gather all the information available on the company, its products, its markets and its competitors, from public data (published accounts, management report, press articles) or private data (sector studies, financial analyst notes).
Step 2: Perform An Economic Diagnosis
The economic diagnosis is primarily used to understand the business model of a company or group from a strategic and financial point of view. The financial diagnosis helps identify the determinants of the long-term economic and financial performance of the company.
Step 3: Choose The Right Evaluation Method
This dual diagnosis, before any evaluation, is all the more important as it determines the choice of the evaluation method. Here, we will develop the four most commonly used methods:
-the asset-based approach based on the revaluation of assets and the calculation of the goodwill annuity;
-the analog method based on multiples of companies or comparable transactions;
-the actuarial method based on the discounting of dividends to the cost of equity or the discounting of free cash flow or cash flows to the cost of capital;
-the real options approach is based on the assumption that shareholders have a put option whose underlying is based on their assets.
Step 4: Develop A Business Plan
In theory, actuarial methods are generally the most appropriate because they assume that the value of an enterprise is equal to the discounted value of the cash flows generated by its activity. However, this type of method requires drawing up a business plan and evaluating the number of potential synergies in case of reconciliation with another group. The Auctus Group are professional in advising companies on issues related to merging and acquisition: https://www.auctusgroupinc.com/top-mergers-acquisitions-firms/
Step 5: Determine The Assumptions And Parameters Of The Evaluation
Like other models that seek to anticipate the evolution of markets or the behavior of economic agents, valuation models are based on many assumptions, both simplistic and reductive, that concern the construction of the business plan or the calculation of the discount rate. The evaluation obtained is meaningful only about the assumptions made.
Step 6: Build A Valuation Range And Conclude On The Value
The purpose of any business valuation is not to give a company a unique value because it does not exist. On the contrary, the evaluator or analyst must seek to construct a range of values by identifying the minimum and maximum values. Evaluation methods should only be considered as decision-making tools for managers and investors.
Step 7: Negotiate And Set A Transfer Price
After completion of the acquisition audits, the negotiation phase can begin. Both parties will rely on the evaluation work and audit findings. This phase usually involves advisers (bankers, lawyers) who will help sellers and buyers to set a transfer price and negotiate the terms and conditions of the contract of assignment.