Valuation of companies
When an entrepreneur thinks about selling a company, merging it, splitting it or simply determining its value on a given date, letting managers know the position of the company vis-a-vis the economic sector that is shared, different methods and tools are used but in many cases are not appropriate for the intended purpose.
The valuation of companies, like any financial tool, is one of the factors that intervene in the decision to buy, sell or negotiate an asset between two interested parties.
Conceptually, it is understood as a process by which values are assigned to events or economic events, according to rules, with particular purposes to inform the investor of the recovery of their capital in the present, considering variables that allow determining their value in time.
Why value a company?
There are several reasons why employers want to value their company; the following list shows the main points of interest of an entrepreneur:
The approaches used are of 3 types:
What are the most used methods to value companies?
There is a set of methods whose purpose is to justify the value that is willing to negotiate on the asset.
One of the advantages of this method is that they are easy to estimate and apply, in addition they can be justified with accounting documents and a static valuation of the company is carried out. On the other hand, the disadvantages come to be, that it does not consider the expected future, no taking into account the value of money over time, nor the flows that are generated in the future, among others.
They are a set of combination of accounting values (or replacement cost) accompanied by surplus value, which is calculated in different ways. It is used interchangeably, interest rate with and without risk, it also mixes the static with the dynamic, and finally, seeks to justify the value of the price you want to prevail in a negotiation..
The conceptual basis of these methods is that the book value of equity, do not relate to their real (market) value; that is, the book value does not express the value that capital have for shareholders, which is really what the market is willing to pay for them according to profits, benefits, or dividends.
The main assumption of the methods based on dividends is that the benefits and dividends are constant and unlimited over time.
It is based on the observation made of a company, through the application of various indicators, especially the stock market of companies with similar characteristics to obtain a value associated with it.
It consists in taking as a basis the stock price of the shares of a company at a certain moment, or its average during a given period, and calculating the value of the company taking the number of shares in circulation multiplied by the price of the share. It has acceptance if the market shows high volatility and volatility.
The technique used in this method is to project the income statement of the company, to know its net profits in the next 5 years. This requires the estimation of income, costs and expenses responding to a trend of the economic, social, political future of the country, the behavior of the market that is shared and the expected demand. The growth of the company, the economic indicators, the application of internal policies in the matter of working capital, financing structure and the capitalizations are considered if necessary.
Most used method, and it is understood that "the company is worth what it is capable of generating through a defined time frame, plus the value of the uncalculated time frame" .
This method seeks to predict a monetary flow of incomes and expenses during the probable life of the company or a project, which are subsequently discounted at the capital cost rate of the company, thus reflecting the value of the money in the time and the degree of risk of the flows.
The cash flows generated by the companies will be obtained from their operating activities, considering the physical, intangible and working capital investments.
It is the tool that shows us the cash flow available to shareholders generated by a company as a business itself during a period. It is the closest to the cash or cash flow. It comes from the EBIT minus the tax associated with the profits deducted from the debt service, the fixed assets to support the operation and the working capital needs, considering amortization and depreciation.
It is called free cash flow (FCL) because it is free of the effects of financing including the savings in taxes for the cancellation of interest.
What steps should you follow in the discounted cash flow?
The methods described have their advantages and disadvantages. Today, those based on discounting future cash flows and multiples of comparable companies are used with greater interest because they are related to the generation of funds in the future of companies.
For the realization of the article the following sources related to the valuation of companies have been taken into account::