PMC Transactions AG performs business valuations to support buyers and sellers in pricing and decision making of a purchase and sale of a business.
Business Valuation is a technique used to capture the intrinsic value of the business.
Common approaches to business valuation include Discounted Cash Flow (DCF), Net Present Value (NPV), Trading Comparables, and Transaction Comparables method described below.
When a Business Valuation is required?
Most common reasons which require a business valuation are
- Selling and Buying a business
- Selling and Buying shares of a company
- Fund raising from investors or IPO
- Liquidation of the company
What is a Company’s value?
A company is held by two categories of owners, shareholders and debt holders.
The value of a pure company which accrues to both categories of owners is called the Enterprise Value, while the value which accrues just to shareholders is the Equity Value (also called market capitalization in the case of listed companies).
Companies are compared using the enterprise value instead of equity value as debt and cash levels may vary significantly even between companies in the same industry.
The three common approaches of valuing a company are described below:
Discounted Cash Flow (DCF)
It is widely believed that DCF is the best method to estimate the fair value of a company. As one would expect, the value of any business is the sum of the cash flows it produces in the future, discounted to the present at an appropriate rate. The discount rate used is the appropriate Weighted Average Cost of Capital (WACC), which reflects the risk of the cash flows and time value of money (TVM).
Trading Comparables (trading comps)
According to the efficient market hypothesis, stock prices at any point in time fully reflect all available information about a given company and industry. Therefore, traded companies provide the best estimate for the valuation of a similar company. Average multiples such as P/E, EV/EBITDA, EV/Sales, P/B, etc. are calculated from all companies that are similar to the company being valued and are used to calculate the value of the company.
Transaction Comparables (transaction comps)
Investment bankers widely use this method to value a company during an acquisition. Technically this method is similar to trading comps and uses multiples such as P/E, EV/EBITDA, EV/Sales, P/B, etc. But the comparables used are companies which have previously undergone a takeover, not peers which trade on the stock market. Takeovers generally value the company higher because the buyer pays a control premium.
EBITDA Multiple Method - [EV/EBITDA Method]
EV/EBITDA (EV:Enterprise Value; EBITDA:Earnings Before Interest, Taxes, Depreciation & Amortization) is the most widely used valuation multiple based on enterprise value to determine the fair market value of a company. EBITDA multiple is capital structure-neutral and can be used to directly compare companies with different levels of debt
Enterprise-Value-To-Sales Method - [EV/Sales Method]
EV/sales gives investors an idea of how much it costs to buy the company's sales. Generally the lower the EV/sales the more attractive or undervalued the company is thought to be. A high EV/Sales is not always a bad thing as it can be a sign that investors believe the future sales will greatly increase. A low EV/sales can signal that the future sales prospects are not very attractive. It is important to compare the ratio with that of other companies in the industry and take a closer look at the company being analyzed.
What is an Asset's value?
The most common approach to valuing an asset (such as a brand with existing revenues) is the Net Present Value (NPV) method described below:
Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, capital project, new venture, and anything that involves cash flow.
NPV analysis is used to determine how much an investment, project, or any series of cash flows is worth. It is an all-encompassing metric, as it takes into account all revenues, expenses, and capital costs associated with an investment in its Free Cash Flow (FCF). In addition to factoring all revenues and costs, it also takes into account the timing of each cash flow that can have a big impact on the present value of an investment.
Both sides of a Transaction (Buyer and Seller) always have different views on the value of a business or investment.
Assigning a monetary value which is acceptable to both parties is as much art as it is science.
However, there are many accepted methods that can be used to value businesses, including DCF, NPV, Trading comps and Transaction comps which help determine a price that is acceptable to both parties.
PMC Transactions AG assists buyers and sellers in valuing businesses and in determining the fair market value of the business.
On your behalf, we deliver a comprehensive, easy-to-understand analysis and data visualization of your business and a professionally commented and clearly illustrated Valuation Report.