How much is my company worth?

What is the purpose of the valuation?

The first question in any valuation: what is the purpose of the valuation? The specific context of the valuation will have a significant impact on the further approach to the valuation. Some examples:

• If you are considering transferring your company, an initial rough valuation can give you an indication of the total value. Further research will also teach you what drives the value of your business and whether you can increase this value in the short term (for example, one or two years).
• If a party is interested in your business, an appropriate valuation will provide you with a strong starting point in negotiations. Furthermore, certain findings from the valuation can also give you good negotiating arguments. In practice, the value is almost never equal to the final negotiated price, so it is all the more important to know which elements drive the value.
• In the context of succession planning, it may be more interesting to know which parts of your business are worth how much. If, for example, you run a successful hospitality business in an exclusive property, it is possible that almost the entire value is linked to the property. Consequently, a separate valuation of the property and the activity will be essential.
• Finally, in the current coalition agreement, there is already mention of proposed valuation methods for unlisted assets. One of the proposals is the sum of the equity and four times the “EBITDA”. Alternatively, there is also mention of an independent valuation by an auditor or accountant. Here, a comparison of the outcomes of the different valuation methods can have a significant tax impact in the long term, regardless of whether you want to transfer your business in the short term!

What do you want to value?

Although this question seems obvious, nothing could be further from the truth. It is important to correctly define what exactly needs to be valued.

If you run your business as a sole proprietorship, the business fund needs to be valued. In this case, it is important to clearly determine which elements are part of the business fund and are therefore included in the valuation. The business fund typically includes the brand name, the clientele, but also the fixed assets used (vans, computers, …) and the concluded contracts (rental, …). Furthermore, it is important to consider the possible liability of the business’s debts. In short, thorough research is in order!

On the other hand, you can run your business from a company. In these cases, it is usually much clearer which (im)movable goods you need to carry out your activity and what debts or costs are involved. But even here, it is possible that certain parts are not relevant to the valuation of your activity. If, for example, you have used the reserves of your company to invest in real estate, this real estate is probably not directly related to your activity and therefore not relevant to its value. Consequently, you need to value the real estate and the activity separately.

Furthermore, it is also possible that you have paid yourself a relatively high salary or no salary at all from your company in recent years as part of financial planning. If you let someone else run the activity, this person will need to be properly compensated for their work. Consequently, a correction or “normalization” must also be made for such expenses.

Finally, it is also possible that your company runs multiple activities. If you want to transfer the activities separately, they must also be valued separately.

How are we going to value the company?

There are different ways to value a company, each with its advantages and disadvantages. The precise choice depends, among other things, on the answers to the previous questions. The two most common methods are, on the one hand, the asset-based methods, and on the other hand, the profitability methods.

In asset-based methods, we look at the current economic value of the company’s assets. In the case of a company, this is the value of all the company’s assets minus all the debts the company still has to pay. The remaining value is the adjusted equity.

In profitability methods, such as the “Discounted Cash Flow” method (“DCF”), the focus is not on what is present, but on the company’s future income. The value of the company is determined by all the future cash flows it will generate. Note, however, that due to inflation and uncertainty, 1,000 euros today is not worth the same as 1,000 euros in 5 years. Money has a time value. The DCF model takes this into account by discounting these future flows. A realistic forecast of future free cash flows is therefore crucial.

In addition to the aforementioned methods, there are also comparative methods based on a financial ratio (profit, EBITDA, …). A commonly used method is to multiply the EBITDA by a multiple.

Sometimes a combination of multiple methods is desirable.

Conclusion

Valuing a company is a complex and subjective exercise. It is important to clearly define in advance what and why you want to value something, in order to determine the right methods based on this. If you have questions about valuations, do not hesitate to contact PKF BOFIDI Audit. We are happy to help you.

This article was written by Imre Stroobants, auditor.