Valuing your company or how to pay the right price

In our previous exchanges, we talked about the diversification strategy. During this one, we discussed external growth. This is done through the acquisition of a new company. But to acquire a business, how do you know that you are paying the right price?

Warren Buffet often said, "Price is what you pay, value is what you receive." To be able to find the right balance between the value received and the price paid, a valuation of the company is necessary.

To stay in line with the realities of Senegal and a relatively undynamic stock market, three methods are presented to us:

- The method by the valuation of net assets or the patrimonial approach

- The method of valuation by multiples

- The discounted cash flow method

Let's start with the patrimonial approach. To value his business, we will retain the net assets of the debts. Each item on the balance sheet is retained for its book value.

To be able to value them, it will be necessary to retain real assets and real liabilities.

A real asset is an asset that has a market value and is tangible. Fictitious assets are rather recorded in the balance sheet for accounting policies (establishment costs, research and development costs, deferred charges...)

The reflection is the same for the liabilities.

Thus, the value of net accounting assets is the sum of real assets less real liabilities.

This approach is well suited to companies where the share of fixed assets is large (commercial activities, industrial, among others).

We can take the thinking a little further with the adjusted net accounting assets which allows us to give a slightly more accurate picture of the value of the company. For this, it will be necessary to add to our net accounting assets the capital gains or losses of disposal on the assets.

The second method that can be used is that of valuation by multiples.

Earlier, I put the cursor back on the realities encountered at the level of the Senegalese space.

One of the approaches can be valuation by multiple stock exchanges. To do this, the analyst must take into consideration listed companies that have the same characteristics as that to be valued (sector, industrial and economic risk).

For each of the companies, the aggregate multiples of the income statement will be calculated (this may be turnover, EBITDA, operating result and PER).

Next, we will calculate the average for each of the multiples in our sample and apply these multiple means on the aggregates of our society.

The transactional method uses the same principles. The only difference lies in the sample, which will no longer be listed companies but rather some that have been the subject of transactions or acquisitions.

The last method is the discounted cash flow method.

We touched on this a bit when evaluating the profitability of a project. In this case, we will rather consider that the economic value of its operating assets is equal to the sum of the discounted future free cash flows that they will generate.

In our context, the discounted cash flow method is the most used, but the other methods can also serve as a benchmark.

Many difficulties can be found to pay the right price but valuing will give you a first idea 😉.