COMPANY VALUATION
Valuation with discounted cash flows and financial multiples
What is it for?
Company valuation is a financial process used to determine the economic value of a company or business unit, as well as establishing the cost of capital (WACC). Benefits from doing this analysis are:
- Deep understanding of the company’s assets
- Understanding the re-sale value
- Ease when doing a synergy or merge
- Easier access to investors
When is necessary to valuate a company?
- Buy and sell operations
- Capital injections
- Re-arrangements between stakeholders
- Inheritances and wills
- Arbitration and litigation processes
- IPOs or new capitalist partners entry
- Strategic planning
- Publicly traded company valuations
- Remuneration systems based on creating economic value
How it is modeled?
The discounted cash flows method (DCF), is executed through the financial structure and macroeconomic factor analysis, projections of the statement of income items are built (income, costs, expenses, debt, among others) and balance sheet (assets, liabilities and heritage).
Based on this predictions, future cash flow is built (In a 5-year projection, and with perpetual growth), which will be brought to present value (NPV) discounting it with the cost of capital (WACC), in order to generate the company’s value, calculus that by excluding net debt, will provide the equity value.
However, there are more valuation methods calculated based on market data, for example, the comparable multiples method, which consists of collating financial indicators of the competition, in order to find the relative valuation of the company.
Negative effects of not valuating a company
If the company is not valuated, there will be uncertainty about the possible transferrable value, and this will make it difficult to establish realistic objectives. Also, there will not be a clear outlook about the real progress and the increased value of the company.
Furthermore, there will be different kind of financial risks to consider when negotiating a trade, including:
- Selling the company for a lower value compared to the real one (equity loss)
- Making an overpriced offer for the company (interest loss from the investor)
If a professional valuation is not taken into account, there will be rejection from possible future investors due to not having a financial support of the presented value.
Why Quae Solutions?
