What is business valuation?

The valuation of a company corresponds to the calculation of its financial value on the basis of the company's accounting data as well as its potential future development.

The sale of a company, or rather a desire to acquire one, requires in-depth work on the valuation of your company. A variety of methods are available to help you do this, including :

  • Scale method
  • Performance-based method
  • A comparative approach

Today, we focus on how this works and the main methods for valuing your company.

Enhancing the value of your business with a patrimonial approach

First of all, we'd like to talk about the "patrimonial method" or patrimonial approach.

This refers to the valuation of all assets and liabilities on the company's balance sheet.

This results in a "net" asset value, both adjusted and revalued.

The latter corresponds to the value of the company

It should be noted that thevaluation of each item is imperative. This is because book values often do not reflect the actual values of assets and liabilities.

That's why it's so important to reassess them.

Valuing your company's performance

Secondly, we can look at the method of valuing our company in relation to its performance, in order to determine the sale price of the structure.

This method is based on the application of a percentage or figure to a company performance indicator, which can be financial indicators such as sales margin or added value.

In addition to financial indicators, we can also use other types of indicators that are fairly representative for particular sectors.

For example, a magazine publisher might base its sales on the number of subscribers it has.

Valuing your business using the free cash flow method

Next, we need to look at the free cash flow method, also known as the "DCF method".

This method is based on the idea thata company's value can be estimated by combining the various cash flows then available, once taxes have been discounted to the rate of return demanded by investors, and once net debt has been deducted.

It is important to stress that this valuation method is based on the company's future performance over a number of years.

This means that cash flows are based on potential estimates, and several assumptions need to be examined for reasons of prudence.

These forecasts must be carried out over long periods to enable the various calculations to be made.

This technique is the most complex of all. For this reason, we strongly recommend that you call on the services of a chartered accountant.

Adding value to your business with the comparative approach

Finally, the comparative approach involves valuing the company in relation to a set of comparable companies with similar sectoral, geographical and operating characteristics.

Such a comparable approach can also be based on a study of recent comparable business disposals.

The primary advantage of this method is to develop a valuation of your business, enabling you to establish a sale price in line with the market.

In any case, it is absolutely essential to have comparable companies nearby, so as to be subject to the same market characteristics.

In conclusion, there are numerous methods for valuing your company.

The difficulty lies in choosing the method best suited to your situation

To do this, you need to choose certain methods, depending on the size of your company and the sector in which it operates.

For example, an innovative company is less likely to find nearby competitors: the comparable method is therefore not the most appropriate, unlike a method based on performance.

A large surface will be more interested in using the comparative method. It's all about knowing your project.