The million-dollar question: «How much is my company worth? Many believe the answer is simple. «My company has a turnover of €10m, so it must be worth at least €15m. But in mergers and acquisitions (M&A), the value of a company is much more than a simple multiplication.
Most common methods for valuing a company
There is no magic formula for calculating the value of a company, but there are methods that help to obtain a more realistic estimate. Let us look at the most commonly used ones:
1. EBITDA multiple
The most commonly used in M&A. EBITDA is multiplied by a coefficient that varies according to sector, growth, risks and other factors. In general:
- Industrial companies: 5x – 8x EBITDA.
- Technology companies: 8x – 12x EBITDA.
- Growing startups: Can exceed 15x EBITDA.
2. Sales multiple (EV/Ventas)
It is used when EBITDA is volatile or negative. It consists of multiplying sales by a factor that depends on the sector:
- Retail: 0.5x – 1.5x sales.
- SaaS software: 5x – 15x sales.
- Pharmaceutical industry: 3x – 6x sales.
3. Book value
It is calculated by subtracting liabilities from assets. Most used in sectors such as banking and insurance, but less relevant in businesses with intangible assets.
4. Discounted Cash Flow (DCF)
It is based on projecting future flows and discounting them to present value. It is technically more accurate, but also more sensitive to changes in growth and risk assumptions.
Factors that can increase or decrease valuation
Regardless of the method used, certain factors influence the final valuation:
Value-enhancing factors
- Steady growth: Companies with recurring revenues and stability are more attractive.
- Diversification of clients: Not relying on too few customers minimises risk.
- Barriers to entry: Intellectual property, long contracts or competitive advantages may justify higher multiples.
Factors that reduce value
- Dependence on few customers: If a single customer accounts for more than 30% of revenue, the risk is high.
- Disorganised finances: Lack of clarity in numbers generates mistrust among buyers.
- Legal or tax problems: Hidden litigation or debts affect the valuation.
Practical example: how does the valuation change depending on the factors?
Let’s assume two companies with a turnover of €10M and EBITDA of €2M:
- Company A: Stable growth, diversified clients, contract with large corporations. Valued at 8x EBITDA → €16M.
- Company B: High dependence on a single customer and revenue fluctuations. Valued at 5x EBITDA → €10M.
Same EBITDA, but different value. The difference is in the perception of risk and sustainability.
Negotiation: key to the final price
The theoretical value is only a starting point. In practice, negotiation and buyer perception greatly influence the final price.
Some key points in the negotiation:
- Due diligence: Financial, legal and operational review can uncover hidden risks and adjust the price.
- Synergies: If the buyer sees opportunities to reduce costs or improve revenues, it may pay more.
- Competition between buyers: If there are several interested parties, the price rises.
Knowing how much your business is worth is only the first step. Selling on the best terms requires strategy, negotiation and a partner who knows the market.
If you are considering selling your company or simply want to know its real value in the current market, contact us. Our team of experts will guide you through every step of the process.