Assessing the value of your target company

Once you’ve decided to proceed with a company acquisition, the final step prior to entering formal negotiations will be determining your valuation of the company. While not necessarily guaranteed to be the final sale price, gaining a proper valuation, based on concrete figures and a sound method, is an invaluable starting point for negotiations and will be crucial to securing the best possible price.

There are several methods that can be used to calculate an accurate (or as accurate as possible) estimation of a target company’s value. Using one of these methods to generate a valuation is a must-do before making an offer or entering into negotiations.

Net asset value

Net asset value represents a solid foundation from which to start the process of valuing a target business. This method involves valuing the business’ assets, minus any outstanding liabilities, bank loans or payments due, according to its audited financial accounts.

With Business Sale Report’s Off-market business search feature, you can easily view a target company’s asset figures, enabling you to quickly determine its net asset value.

Cashflow value:

Another way to value a target business pre-acquisition is to forecast its future earnings for a few years and then, applying a discount factor, discount these forecast earnings figures to reach a current valuation of the company.

Price/earnings ratio:

A price/earnings ration (P/E) is one of the most common methods of valuing a business. Using this method, you take a company’s share price and divide this by its earnings per share, giving you your P/E ratio. So, for example, if a company has a share price of £50 and earnings per share of £4, it would have a P/E ratio of 12.5.

This method can also be applied to private, unquoted businesses. For example, if a business is generating post-tax profits of £2 million and the cashflow value/net asset value/owner’s asking price is £10 million, then this valuation would represent a P/E ratio of 5.

You can then take this figure and compare it with the average P/E ratio of the relevant sector, which you can check using sources such as the Financial Times, or by consulting an industry expert. For private companies, a discount will typically be applied on the P/E ratio compared to listed counterparts, which are usually given higher valuations.

Again, using our off-market company search facility, you can quickly and conveniently view a company’s turnover, profit or loss figures (if published) in order to determine a P/E ratio.

Then

Also see
Why you should consider off-market acquisition opportunities
How to identify target companies
Assessing the target company