What is company valuation?
Thanks to the advertising websites on the internet, it is very easy to determine the price of a mobile phone or a car. This method, however, cannot be applied to a company since every company is unique. Nevertheless, it is still a valid request from the company’s managers, owners to know the company’s value.
A company’s value can be determined in two ways. First, we can talk about a company’s book value, where the calculation is based on the accounting rules. In theory this is the amount the company would be worth in that moment, if all its assets were sold and all its debt (e.g., loans) were repaid.
Second, we can talk about a company’s economic value, that is the amount the investors are willing to give for the possession of the future benefits of the company. This amount depends on the future cash-generating capacity of the company, on the future interest rate developments and other financial factors that require special expertise to determine and in which Danube Capital’s professional team has gained multiple decades of experience.
When do I need to determine my company’s value? What can I use it for?
The price, the value of a phone or a car becomes interesting if we want to buy or sell one. This is true in the case of a company, as well. Hence, a company’s value is important if it is on the verge of selling, acquiring, raising capital, or even merging one.
This is also true when a company is going through a generational shift or it wants to gain new markets and customers, because even then it is essential to be aware of the value of the corporation. In this case, Danube Capital’s comprehensive company valuation service is of great help.
How can a company’s value be determined?
A company’s worth can be calculated in several ways. In the case of a wine, its vintage is a key factor or in the case of a car the mileage plays a major role, in the case of a company there are many factors which determine its value. Depending on the complexity of the project, Danube Capital uses all methods listed below when determining the value of a corporation:
- pricing indicators of similar corporate transactions in recent years (industry, region, size).
- financial forecasting model built by Danube Capital’s professional team (discounted cash flow, dividend growth etc.).
- a relative valuation model i.e., estimates based on the financial ratios of the peer group.
The simultaneous application of these methods ensures that stakeholders in a company valuation get a justified and realistic picture of the magnitude of a company’s value, as each procedure approaches the company’s value from different perspectives. In a transaction the seller and buyer must agree on complex terms, otherwise the deal would not happen.
How is a company’s valuation conducted? What do I, as a potential client, have to contribute?
A company valuation is only as good and accurate as the quality of the historical business data received from the company. As a result, the information required for a company’s valuation is based on the company’s financial statements, interviews with the members of the management, the company’s business plan, and a personal visit to the company’s headquarters. The latter is especially essential if the company has a production line and/or industrial real estate.
Do I have to share my business plan? In case of no business plan, how is my company valuated?
If a business plan exists, the answer is yes, the client is expected to share it as it contains important data and information including the expected development of revenues, expenses, and other financial items for the following 3-5 years. In case there is no business plan available, Danube Capital’s professional team compiles the company’s business plan based on the interviews with the management and the forecasts of its own sectoral and macroeconomic experts.
What does Danube Capital offer me?
In the case of a company valuation, we can provide a simple and a more complex option:
- Under the basic company valuation model, the customer receives the company valuation in the form of a detailed presentation within 5 working days. The presentation contains the estimated value of the company, based on relative competitor valuation, and a simple model, where the historical financial indicators and ratios are considered. On the other hand, this research does not consider the future development and risks of the industry due to the methodological approach. In this case we do not consider the opportunities of the following years such as market share improvement, company expansion, possible acquisitions, mergers.
- The longer, more complex analysis contains the economic outlook, external developments, mapping of the company’s operations, competitor analysis, the pricing assessment of previous, similar transactions, a complex model with the mapping of future challenges, possibilities, and risks. In this case the duration of the analysis is about 1,5-2 month.
It is important to note, that in both cases a follow-up personal presentation of the analysis is highly recommended to discuss the detailed assumptions behind the financial forecasts and to answer any questions that may arise.
Why is it necessary to involve a professional into the company evaluation process?
In the case of a company transaction, it is very rare that the seller’s and the buyer’s opinion on the pricing coincide, which is mainly because of the informational asymmetry. A company’s seller has an informational advantage since he or she sees the company’s daily operation. On the other hand, the buyer is not involved the company’s operation, and most of the time wants to validate the risks related to this informational asymmetry in the pricing. I.e., the customer wants to purchase with a discount, while the seller wants to sell with a premium; just like in the case of purchasing a used car. Probably, at this point of the transaction neither party has a complex analysis of the company’s worth. The research made by Danube Capital’s professional team brings the buyer’s and the seller’s interest closer, which points towards a successful transaction.
How long does a company’s evaluation take? What will it cost me?
Why should I choose Danube Capital? What kind of references do they have and where can I find them?
Throughout the years the professional team at Danube Capital has made several company evaluations among public (listed) and private companies. The analyses cover several industries (e.g., utilities, construction, technology, real estate, logistics, industry, and finance).
- Evaluation of joint stock companies listed on the Budapest Stock Exchange:
- ALTEO Nyrt. (renewable and traditional energy);
- BIF Budapesti Ingatlanhasznosító Nyrt. (real estate development)
- Masterplast Nyrt. (construction materials)
- Megakrán Nyrt. (industry, material handling)
- Valuation of the domestic subsidiaries of a multinational company, creation of unique business models
- Valuation of a domestic fund manager (involved in financial asset management)
- Evaluation of a domestic shipping and logistics company (industry, logistics, real estate)
- Valuation of the minority shareholding of a domestic company with majority internationally ownership operating in the construction industry