Version française/French version: LINK
This article addresses the estimation of a company’s value for negotiation with potential investors or buyers. Ultimately, the value will be determined through an agreement between the involved parties. Evaluation methods, such as those based on revenue, operating income, and net income, are adjusted using sector-specific coefficients and combined to derive a valuation range. The three primary valuation methods are the asset-based method (adjusted net asset value), the income approach (company performance), and the cash flow projection approach. The quality of management, situational factors, and strategic assets (patents, trademarks) also impact the valuation. By combining various methods, a price range is established for final negotiation. However, the price determination process fundamentally remains a matter of negotiation.
E. Krieger
How much is my company worth? On what basis can we negotiate with investors or potential buyers? Without aiming to replace detailed financial analyses, here are some avenues to estimate the value. Similar to real estate, it’s important to emphasize from the outset that the value of your company will ultimately be the price agreed upon by the parties involved. Everything else is mere speculation.
While some startups or traditional companies are sold « as-is, » others are sometimes acquired at prices that even surprise the beneficiaries of the sale. If your company holds strategic value in the eyes of a potential buyer, the selling price can reach new heights.
Many valuations are based on metrics like revenue, operating income, or net income. These economic performance indicators are multiplied by coefficients specific to your industry. These values are then adjusted for financial debts and the company’s cash reserves. Multiple methods are combined to arrive at an average value or valuation range.
More of an Art than a Science
Indicative figures based on the industry and the company’s stage of development suggest that the multiple of annual revenue could vary from 0.3 to 3 or even beyond. Generally, this coefficient falls between 0.5 and 2. The wide range of these indicative figures highlights the difficulty, if not impossibility, of considering the valuation process as strictly « scientific. » In reality, valuing a company lies at the intersection of financial mathematics and the bustling souk of Marrakech, with negotiation being a clear advantage in this Moroccan hub of commerce and craftsmanship.
Considering both the Past and the Future
To refine your evaluation, you can take into account the current performance as well as your medium-term financial forecasts. Future cash flows are adjusted with a discount rate ranging from 10% for a low-risk company in a mature sector to 60% for a high-risk project in its early stages. The discount rate and multiplier coefficients vary based on your industry and the maturity of your company. Such estimations can then lead to valuation ranges that can vary significantly, potentially even doubling.
Although these valuation methods remain subjective and empirical, they nonetheless serve as an interesting basis for determining a « reasonable value. »
3 main Families of Valuation Methods
There are generally three families of valuation methods:
- The « asset-based » method, which evaluates your company’s adjusted net assets, accounting for gains and/or losses on certain assets.
- The « income approach, » based on your company’s performance as indicated by metrics like revenue or operating income.
- The « discounted cash flow » valuation, based on projected free cash flows. This emphasizes your future prospects and your practical ability to generate liquidity.
Valuing a business based on its future cash generation makes sense. This method explains why some heavily loss-making startups can have astronomical valuations if their potential to generate future cash flows is substantial. This valuation approach is highly sensitive to your assumptions about margins and growth rates.
Other valuation methods are variations of these three core approaches, including comparative approaches and benchmark evaluations, where a « normative » performance similar to companies in the same sector is assumed.
A colleague of mine, Gilles Lecointre, who has conducted numerous business valuations, approaches valuing a small to medium-sized enterprise as « once its past plus twice its future. » In simple terms, this involves adding equity and twice the operating income, while subtracting debts and adding available cash.
The Influence of Elements that are more Difficult to Quantify
Beyond these normative approaches, the quality of management is a crucial evaluation criterion, regardless of the company’s developmental stage. External factors can also significantly impact your valuation range. After the burst of the dot-com bubble in March 2000, many companies that had seen explosive growth in the stock market experienced severe declines, with their share prices sometimes dropping by a factor of ten compared to the euphoric times. The valuation of unlisted companies was naturally affected by this widespread downturn. Such episodes are clearly prone to recur.
With the exception of the cash flow projection approach, traditional valuation methods don’t always account for the almost astronomical valuations of companies with strategic assets (know-how, patents, trademarks, and other intellectual property rights). This is because the commercial development potential of these companies is often appreciated over a span of more than five years. As an example, a biotechnology company could have no revenue and significant losses while still experiencing regular valuation growth, reaching tens of millions of dollars, thanks to its patent portfolio, the development stage of its molecules, and the potential industrial and commercial agreements with pharmaceutical groups.
Valuation Ranges and Unmissable Opportunities
Ultimately, you will define a negotiation range that includes a minimum threshold below which you will likely refuse any deal (if it’s disadvantageous) and a ceiling beyond which you will seriously consider the « sale » option because the proposed price is « too good to refuse. »
By combining different valuation methods, you will arrive at a price range from which you will decide whether or not to deviate based on « political » considerations. The debate can be framed with rational and highly quantitative considerations, but the determination of the final price remains, above all, a matter of negotiation.
