What is your company worth?

Several factors affect company valuations, but two key perspectives are the most salient. One is the acquiror’s assessment of the risk that the company will enter a downward trajectory in the wake of an acquisition. The other is the positive development potential represented by the company.

In this article, we will take a closer look at the various factors that help determine the value of a company.

Risk
The risk associated with an acquisition is often assessed in relation to the size of the company, its dependence on key personnel, what customers it has, its relationship with those customers, competition conditions and its competitive advantages, its business model, whether its engagements/services are contracted on a recurring or one-off basis, the magnitude of such engagements/services, market developments and the capital tied up in the company (operating assets, inventories, working capital).

Development potential
The positive development potential offered by a company is assessed on the basis of market developments and long-term trends, the company’s own development plans, as well as potential synergies between the company and the acquiror’s own business. Scalability (the scope for growing the business in new markets), the mix between fixed and variable costs, along with the prospects for growth through further acquisitions, add further dimensions to the assessment of the potential inherent in the company.

Multiples
The valuation of a company involves several variables, but a method based on multiples is in practice often used to put a price tag on a company. The parties largely rely on the pricing of similar transactions, in terms of the ratios between the price and the company’s profits and revenues for the last known financial years, which ratios are termed multiples. In other words, what you need to multiply the profits or revenues by to arrive at the price of a company. For listed shares, such multiples are published daily.

Specialised transaction advisors like us at Stratema, who complete numerous transactions in the construction and technology industries, also gain experience from transactions in which the purchase price is not made public.

Multiplying such multiples by profits or revenues provides an indication of Enterprise Value (EV), or the value of the company’s business operations. To calculate the value of the company shares (Share Value), an adjustment needs to be made to account for balance sheet values. This normally involves adding the cash, subtracting the long-term debt and adjusting by the difference between the working capital at the time of the transaction and the average working capital over the last 12 or 24 months.

Transaction structure
In order to reflect the risk and development potential inherent in a transaction, it is customary to split payment of the purchase price into two instalments. One instalment upon transfer of the shares and one instalment based on the company’s performance over the next 1-3 years. This enables the acquiror to pay a price based on historical accounting figures at the time of share transfer, thereby minimising risk. It nevertheless provides for an additional payment to the owners after they have sold their shares, if company performance improves in subsequent years. This may offer sellers scope for receiving a total consideration that exceeds what was the value of the company at the time of their share sale. Besides, sellers may also reinvest part of the purchase price in the acquiring company, thereby continuing to hold an ownership stake. This is most common when the acquiror is planning to make a series of further acquisitions. Experience shows that this latter element may give sellers a very favourable return on their reinvestment, with total capital gains being far in excess of the market value at the time of sale.

Valuation of your company
Assessing the value of a company is an intricate process that requires expertise and experience. As specialists in construction and technology sector transactions, Stratema has in-depth knowledge of the relevant financial multiples, along with experience of the other factors that affect valuations in these industries. These are essential prerequisites for performing an accurate and reliable valuation.