One of the most common questions we receive daily from entrepreneurs entering the M&A world with the intention of selling their business is, “Will I be able to value my company advantageously?”

In the world of mergers and acquisitions (M&A), accurately valuing a company is crucial for making informed decisions and negotiating fair deals.

There are several methods for calculating a company’s value, each with its own advantages and limitations. Let’s explore the main business valuation methods and how we handle them at Winnerge.

Market multiples method

The market multiples method is generally considered in the literature as a benchmarking tool for valuing large companies.

However, at Winnerge, we believe that this method is one of the most reliable for valuing small and medium-sized enterprises (SMEs), especially when combined with the Discounted Cash Flow (DCF) method.

This approach uses financial multiples of comparable companies in terms of size, industry, and market, such as the price/earnings ratio (P/E), enterprise value/EBITDA ratio (EV/EBITDA), and enterprise value/sales ratio (EV/Sales).

At Winnerge, we employ the market multiples method, assuming that every company has documents like the income statement and balance sheet that reflect its past and present performance.

Our objective is to project these numbers into the future, highlighting the company’s potential and identifying the most suitable market opportunities to achieve a sale that reflects the company’s true value.

Valuation is achieved by determining the appropriate multiple, calculated by comparing the company’s operations with similar businesses that have already undergone sales transactions or by using industry statistical tables.

Discounted Cash Flow (DCF) method

The discounted cash flow (DCF) method values a company based on the sum of expected future cash flows, discounted to their present value.

This method is particularly useful for companies with predictable and stable cash flows.

At Winnerge, we use this method to verify the reliability of the results obtained through the market multiples method.

If there is congruence in the values, the multiples method can be considered reliable. Otherwise, we aim to reach a more balanced valuation by gaining a better understanding of the context.

Summary

Valuing a company in the context of M&A transactions is a complex process that requires thorough analysis.

The Winnerge approach considers not only a company’s past and present but focuses on illustrating its future potential with numbers.

Therefore, using a primary valuation method combined with a secondary verification method allows for a more accurate and representative estimate of the company’s true value.

This integrated approach ensures that each company is evaluated not only based on its historical data but also in relation to its growth prospects and current market conditions, ensuring a fair and advantageous valuation.