How to evaluate the business to be acquired.

Choosing the right valuation method depends on the business and the transaction.

Evaluation is a qualitative exercise, which is not based on a simple formula, it is generally advisable to call on a professional of company evaluation to obtain an independent evaluation. This evaluator’s report can uncover hidden financial problems and provide a good basis for negotiation.

Here are the three steps to determine the value of a business.

1. Determine the level of assessment :

The first step is to determine the level of complexity and assurance that the evaluation report must provide. An evaluator can write their report at three different levels, from a basic report to a very detailed report.

The more detailed the report is, the more expensive it is, and the greater the assurance that the appraisal accurately reflects the true value of the business.

  • Calculation ratio
  • Estimation report
  • Comprehensive report

2.Obtain company information:

Once an engagement letter has been signed with the company, the appraiser can access the financial documents and other information he or she needs to prepare his or her appraisal report. The amount of data depends on the type of report the evaluator is required to prepare. Information generally includes:

  • Financial statements for the past three to five years;
  • The previous year’s tax return;
  • A list of discretionary and non-recurring or one-time expenditures;
  • The remuneration of the directors;
  • The location of the business, the square footage of its facilities and its ownership or tenant status;
  • The number of employees;
  • Patents, articles of association and shareholder agreements;

3. Apply an appropriate assessment method :

An evaluator selects the method or combination of methods best suited to the type of business and the information available.

Keep in mind that the appraiser determines the fair market value of a business for an independent party. This means that it estimates the value of the company without taking into account the synergies expected by the buyer or the strategic considerations of the latter.

Profit-based methods :

Market-based methods :

  • The business line and location;
  • The conditions of the market;
  • Sales trends;
  • Multiples used by comparable companies;
  • The size and maturity of the company;
  • Stability of past and expected earnings and cash flows;
  • Diversification of customers and suppliers;
  • Commercial funds and intellectual property;
  • Dependency on key owners and employees;
  • Employee engagement;

Asset-based methods :

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