Determining the value of a target company is a critical step in the M&A process. Several valuation methods can be used to assess the fair market value of the target company and negotiate a reasonable price. Read our guide on how value a business
Probably the most common valuation method, especially for owner managed SME’s is by using a multiple of the EBITDA. What this essentially means is that the valuation is equal to the profit of the business multiplied by a number (called the multiple). To be more specific, the profit is not actually used but the EBITDA - this means Earnings before Interest, Tax, Depreciation and Amortisation. Hence the EBITDA acronym. So take the profit you made, add back in those 4 elements and you have the EBITDA. This is the number then multiplied to get a final valuation.
One other common valuation method is the discounted cash flow (DCF) analysis, which estimates the present value of the target company's expected future cash flows. This method takes into account the time value of money and provides a comprehensive view of the company's intrinsic value.
Another commonly used valuation method is the comparable company analysis, which involves comparing the financial ratios and performance metrics of the target company with similar publicly traded companies in the same industry. This method helps determine a reasonable valuation range based on market multiples.
Asset-based valuation is another approach that focuses on the target company's tangible and intangible assets. This method calculates the net asset value by subtracting the liabilities from the total value of the company's assets.