Valuing your company, a headache
Valuing your company, a headache
Many business owners grapple with the same question before initiating a transfer process: How much is my company worth? Often, they find themselves isolated in their office or at home, struggling to find a concrete answer.
This subject, often seen as elusive or “pie in the sky”, has been addressed countless times in various articles and books. However, when confronted with this issue, the company manager frequently feels overwhelmed and may be reluctant or unable to devote the necessary time to navigate through the technical intricacies that often provoke more questions than they answer.
So, should we attempt to demystify this issue? I believe so. As the saying goes, “perfection is the enemy of good,” and it is often better to adopt a swift and rational approach rather than succumbing to a paralyzing wave of doubt and introspection.
To begin with, our analysis will focus solely on companies with a history of at least three to four years, recurring profitability over the last two fiscal years at minimum, and a size of between 1 and 20 million euros in sales. Some may argue that this segment is too narrow, but I contend that a significant number of business leaders will see their companies reflected in this description. In France, for instance, there are approximately 440,000 companies, around 215,000 of which have a turnover between 1 and 20 million euros, and 167,000 of these are profitable.
Is valuing your company a headache? Not necessarily….
The value of a company to a buyer (which is our primary concern) comprises two main elements:
After these elements are assessed, we can commence the valuation process. It’s clear that a multitude of factors will influence this relatively straightforward approach, but the company manager, being cognizant of these, will need to adjust their expectations and calculations accordingly.
From the aforementioned elements, we can construct a relatively simple matrix, focusing on the Enterprise Value, i.e., before considering the net financial debt and translating it into a multiple of the Operating Profit:
| Growth / Sector | Low Decrease | Stable | Strong |
| Traditional | 2.5 – 3.0 | 3.0 – 4.0 | 4.0 – 5.5 |
| Attractive | 3.0 – 4.0 | 4.0 – 5.0 | 5.0 – 6.5 |
| Very Attractive | 3.5 – 4.5 | 4.5- 6.0 | 6.0 – 8.0 |
Several important points to note about this table:
- The operating result can be weighted over two or even three years, with a higher weighting for the most recent years.
- If a projection for the current year is available, it should be incorporated into the calculations.
- For rapidly growing companies, the price may be partially determined by an earn-out or vendor credit to validate the prospects presented.
- If any adjustments are needed, they should be incorporated and based on a restated Operating Income. Generally, the main adjustments observed are:
- Non-recurring expenses that negatively affect the result.
- Remuneration of the executive(s) being either too high or too low.
- The size of the company and its market position should also be considered as correction factors.
For the Net Financial Debt section, one simply needs to take the most recent balance sheet and calculate this amount, decreasing or increasing the enterprise value depending on whether the company has debt or a cash surplus. If required, a seasonality factor can be introduced if the cash flow fluctuates within a year; in such cases, the midpoint is taken.
An essential aspect to consider is the company’s dependence on the manager or managers. This factor does not devalue the company if it is addressed carefully by the buyer. The transition period should be substantial, and the transfer price should include a vendor credit or additional price to ensure the “good and loyal” services of the transferor.
Georges Mereau
Email : georges.mereau@actoria.fr
Tel : +33 (0)6 80 40 29 18
