Valuing a Business

Business valuation involves assessing the market value of the company . Different techniques can be applied to value a company ( SAS , SARL , EURL , SASU , SCI …):

  • The actuarial approach: Gordon Shapiro model, Bates model, etc.;
  • The comparative approach;
  • The comparable companies approach.
  • It is still advisable to be accompanied by a professional, such as a CCEF expert in this process.

What is business valuation?

Business valuation is a method used to estimate the financial worth of a business . The estimate is based on numerous criteria making it possible to assess the potential, strengths, specificities and weaknesses of the company.

Why value your business?

  • The valuation of a company makes it possible to better understand its company and its heritage. There are many reasons that lead a business leader to value his business:
  • Estimate the value of the company to better position it on the business market ;
  • Know the value of his assets in the company with a view to a sale of shares (SCI) , sale of shares (SAS) or securities;
  • Establish more efficient business management in order to increase the value of the business;
  • Better manage business by learning about the strengths and weaknesses of the company;
  • Determine a development strategy based on the real value of the company and its potential;
  • Detect gaps in order to find solutions after a complete diagnosis;
  • Present a business plan to obtain financing and convince bankers;
  • Convince financial partners to invest in the company’s capital;
  • Improve the development potential , profitability and financial strength of the company;
  • Evaluate the business for a business takeover or sale;
  • Precisely determine the amount of taxes on dividends, capital gains, etc.

In short, the valuation of a company presents many interests whatever the motivation of the entrepreneur .

When to value your business?

Valuing your business is an essential step for the evaluation of the company . There is no fixed deadline or date for its completion. The valuation is especially carried out when a manager, a partner or a company director wishes:

  • Sell your business or transfer your shares;
  • Transmit his shares in the company;
  • Acquire a new business or shares;
  • Determine the value of its taxes and duties.

How to value your business?

In order to enhance your business, you must carry out a complete diagnosis . To do this, it is advisable to consider the specific elements that directly or indirectly influence the value of the company. In general, it is necessary to take into account, among other things:

  • Human capital: guarantees the functioning of society;
  • The social climate: guarantee of productivity, skills development and motivation;
  • The management team: an element that reassures potential investors;
  • The quality of the clientele: decisive for the turnover and the sale of products or services;
  • The financial structure: element that can be a real source of profits and growth;
  • The financial potential: guarantee of the sustainability of the company and its development;
  • The internal and external environment of the company ;
  • The position of the company in the market and the market value;
  • The skills and know-how of the company.
  • The valuation of the company can be done using different methods.

Valuing your business: the different methods

There are different methods of business valuation. The choice of technique to apply depends on the company. The entrepreneur can opt for:

Valuing your business using the actuarial approach
The actuarial approach is a business valuation technique that consists of estimating the future income streams generated by considering the risk of the economic asset.

The actuarial approach: how it works
When valuing a business through the actuarial approach, a discount rate will be defined taking into account future cash flows , which most reflect the wealth of the business . This rate makes it possible to determine the level of risk of the company. The flows considered can be:

Dividends distributed: often chosen as flows for industrial companies;
“Cash flows”: flows chosen for growing companies;
The future profits of the company.


The actuarial approach: the Gordon Shapiro model
The application of the actuarial approach can be done in different ways. The Gordon Shapiro model is a valuation based on discounted dividends . According to this technique, the price of a share is calculated as follows:

Price of a share = amount of future dividend flows generated after discounting the rate of return

This approach determines other assumptions for the valuation of a share:

The profit distribution rate remains unchanged each year;
Profits increase perpetually (dividends increase at a constant rate each year);
Dividends are distributed over an indefinite period.
According to the actuarial approach, the valuation of a company is determined by applying the following formula:

Valuation = Dividend for the year used / (Rate of return set by shareholders – Growth rate of profits)

For the calculation to be made, the rate of growth of profits must be lower than the rate of return demanded by the shareholders of the company. However, this is not always the case.

Note : the Gordon Shapiro approach is rarely used to value a company. Otherwise, it is used in addition to another technique.
The actuarial approach: the Bates model
Another actuarial approach that uses comparative logic is the Bates model . It consists in valuing a company by taking into account the pay-out ratio and the future profits of the company . The observation is made over a determined total period, then divided into sub-periods for more refined data. Compared to the Bates model, this method is more realistic.

The principle of the Bates model is as follows:

Collect the data according to the sector or the reference sample of the company: Pay-out, Price Earning, profitability fixed by the shareholders and growth rate of profits over n years;
Define the Price Earning Ration (PER) of the sector in a given year;
PERn sector is equal to the PERn of the company beyond the determined year;
Use analysts’ forecasts over a given period to define the company’s valuation.
To obtain the valuation of the company by the Bates model, the formula to be applied is the following:

PER company = PERn + [(Pay-out of the current year / 0.1) B] /A;
Valuation = PER company x profit over the current year.
Note : B and A are calculation parameters determined after reading the Bates table.
The actuarial approach: the method of discounting “free cash flows”
The method of discounting “ free cash-flows ” or DCF is mainly used to value innovative companies. The valuation of the company is defined according to the available cash flows or “Free Cash-Flows”. It is measured by the company’s ability to make a profit.

The DCF method is mainly recommended in addition to the discounting of profits . It is effective in measuring the financial performance of the company. The principle of this business valuation technique is simple:

The value of the company (considered as an entity) depends on its ability to make profits, but not on the profits it makes;
The valuation of the company is determined by the free cash flow;
The value of a company is obtained by the discounted sum of the future flows generated without considering its financial debts;
Three key elements are taken into account: initial cash flows, long-term cash flows and the cost of capital;
The discounting of cash flows at a rate greater than or equal to the cost of capital makes it possible to estimate the increase in value and the additional profits.
Note : free cash flow corresponds to the net cash surplus.
The formula to be applied for the valuation of a company according to the DCF method is as follows:

Valuation = Free cash flow x (1 + discount rate) ‾ ª + Free cash flow y (1 + discount rate) ‾ ⁿ

The discount rate corresponds to the weighted cost of capital on average. “x” designates the first year considered and “y” the last year.

The value of free cash flow (FCF) is often determined using forecast data or the company’s TPFF. There are different formulas:

FCF = DAFIC – (operating income x corporate tax rate);
FCF = Net Res;
FCF n = FCF / (t – g).
“g” is the growth rate of free cash flows to infinity. “n” is a number of years.

Valuing your business through the comparative approach
Comparative approach: operation
The comparative approach often complements the actuarial approach , especially the DCF method. It consists of assessing the value of the company by considering its competitors and its sector of activity.

The valuation of a company by the comparative approach is based on several elements, including:

The business sector of the company;
comparable transactions;
Companies with a similar profile (size, risk, sector, market, etc.);
Benchmark indices: IT.CAC, CAC40, Nouveau Marché.
The valuation of your company using the comparable companies approach
The comparable companies approach is a company valuation method which is based on the comparison of several similar companies called a ” peer group “. The value of the company is measured using valuation ratios and multiples.

Company approach: operation
The valuation of a company via the comparable companies approach consists in using the data collected in the “peer group” or the sector of activity to define an average of ratios . The ratios will then be used to determine the value of the business. This method is common for determining the value of a listed company.

Company approach: advantages
The company approach has some advantages. This method is reactive to the market. It provides information on the market price at a given time . The valuation of the company is generally close to reality.

Corporate approach: drawbacks
The approach by companies does not most of the time give the patrimonial value of a company. In general, the valuation obtained changes rapidly between two given periods. To estimate the value of the company, it is necessary to obtain information on the accounting elements of comparable companies, which can be difficult.

Valuing your business using the transactional reference approach
The transactional reference approach is one of the comparative methods of business valuation.

Approach by transactional references: functioning
Applying the transactional reference approach is more or less straightforward . It’s necessary :

Carry out a reconciliation operation to obtain the financial data of similar companies;
Measure and reconcile company ratios;
Determine average ratios for the valuation of the company;
Apply a rating or a discount on the initial valuation.
Approach by transactional references: advantages
The main advantage of the transactional reference approach is its ease of application. Valuation is more relevant because it is measured according to the specifics of the company and similar companies.

Approach by transactional references: limits
This business valuation technique has its limits. As no two companies are identical financially, economically and socially, this can make valuation difficult .

Valuing your business using the comparative organizational method
The organizational comparative method consists in taking into consideration the immaterial capital of the company (source of synergy) to define its value.

Organizational Comparative Method: Operation
The organizational comparative method is based on indicators entering into the formation of benchmarking . They will be used to assess the relational capital, the human capital and the structural capital of the company. A median enterprise value is usually defined. To do this, the following formula is applied: indicator x company results.

Note : the indicators are obtained after the analysis of human resources management and quality management.
The valuation of your company using the stock market comparables method
The functioning of the market comparables method is easy to understand. To apply it, all you have to do is:

Determine the aggregates of society;
Calculate multiples;
Set mean/median;
Apply aggregates.
The initial sample is drawn up using data from listed companies carrying out activities identical to the company to be valued.

Valuing your business using the comparable transactions method
The comparable transactions method makes it possible to value a company by determining comparable transactions that have occurred in the sector of the company to be valued. It consists of :

  • Look for key aggregates, such as EBIT, turnover or EBITDA;
  • Define the value of companies (VE) in the same sector;
  • Calculate the valuation multiple: EV / EBIT or EV / CA or EV / EBITDA;
  • Apply the average of the multiples of the sample to the aggregates of the company to be valued.


The valuation of your company using heritage and mixed accounting methods
The valuation of a company is generally measured by its balance sheet. However, this indicator does not give the exact value of the company. It is then necessary to define a range of value using one of the heritage and mixed accounting methods: calculation of net accounting assets or calculation of ratios.

Calculation of net book assets
The calculation of the adjusted net book value constitutes a complete business valuation technique . The calculation can also be made by determining the permanent net operating capital, or the gross substantial value. Valuation by this method also involves discounting the difference with the asset, then multiplying the result obtained by the risk-free rate. Thereafter, the profit generated by the asset must be deducted in order to define the company’s goodwill or “goodwill”.

Calculation of ratios
The calculation of ratios is another accounting and mixed technique dedicated to business valuation. Its application is simpler than the calculation of net book assets. It consists in highlighting the level of profit according to the liabilities of the company or its capital. The calculation of ratios is mainly used to analyze the balance sheet of credit institutions.

Valuing your business using flow analysis methods
Flow analysis methods consist in making a projection of the financial result to determine the value of a company. This technique is based on the cash flows and the profit generated after the income statement. To value a company through flow analysis, it is possible to apply:

The CFROI: is based on the net present value of the company;
EVA analysis: is based on fund flows to carry out a financial analysis.
Valuing your business based on its performance
The valuation of a company in relation to performance is mainly used to assess the sale price of the company. This method is based on various financial indicators such as added value , accounting result , commercial margin and gross operating surplus . Its application is relatively simple. Simply apply a number or a percentage to the defined performance indicator.

Note : the choice of indicator depends on the company’s activity. It is possible to choose the audience, the number of subscribers, the volume of production…
Valuing your business with scales
The business valuation method based on scales makes it possible above all to value the creation of a small business . Its application is based on the use of scales as a percentage of the company’s turnover on a given date , without taking inventory into account.

Note : this technique does not make it possible to determine the profitability of a business. It is especially recommended for estimating the sale price of a company.
In summary, the choice of company valuation method depends on the valuation objective, the company’s activity and its size. It is sometimes necessary to use several methods to obtain a more refined result.

Valuing your business: the ratios to know

To value your business, you often have to use ratios such as the PER or the PBR. In order to better understand the techniques of company valuation , it is necessary to know these ratios.

PER: Price Earnings Ratio
The Price Earning Ratio is the most used of all. This is the price-earnings ratio of a company.

How to calculate the PER?
The PER is determined in two ways:

PER = current ratio of a share + net earnings per share;
PER = valuation relative to net profit.
For a listed company, the PER corresponds to the market capitalization.

How does the PER work?
The PER is generally used to estimate the market price of a security . In principle, a low Price Earning Ratio indicates a good market. When valuing a business, the comparison of the PER obtained with the sector PER is often made. The sectoral PER is determined according to the payback period of the investment. This ratio shows the number of years of profit needed to recoup the initial investment.

Note : this ratio makes it possible to value a company without using another method. This indicator is mainly used in the application of the comparable approach to business valuation.
The capitalization to dividend ratio
The capitalization to dividend ratio is close to the PER. However, its calculation is based on dividends paid instead of profits earned .

How to define the capitalization to dividend ratio?
The capitalization to dividend ratio is determined based on the actual income of the company’s shareholder and the actual investment payback period . It therefore makes it possible to better define the performance values of the company.

When to use the capitalization to dividend ratio?
The use of this ratio is especially recommended to estimate the return on investment of a company . To value a company, it should be used in addition to other indicators.

The PBR: Price to Book Ratio
The Price to Book Ratio is used to value a company using the comparable company approach or another comparative method.

How to calculate the PBR?
To determine the ACB, it is necessary to determine the capitalization and the net book assets of the company (ANC). Net book value per share can also be used. There are two calculation methods to define the ANC:

ANC = Book Assets – Fictitious Assets – Debts;
ANC = Equity – Fictitious Assets.
The PBR is then calculated as follows: ratio capitalization / ANC.

How does PBR work?
A PBR below 1 indicates that the company is undervalued. In other words, its value is less important than its book value . However, this result is quite rare.

The PSR: Price to Sales Ratio
The Price to Sales Ratio, or PSR, is a ratio used to value a company based on a sales multiple . It can be used to define a standard.

How to calculate the PSR?
In principle, the PSR is determined using a simple formula : capitalization / turnover. Sometimes, to obtain a more refined result, the calculation of this ratio is done as follows: (capitalization + net debt) / Turnover). This formula takes debt into account for a more efficient valuation.

How does PSR work?
The PSR is an indicator used to determine the number of times the turnover has been integrated into the valuation of a given company . This method assumes that:

Revenue is more reliable in determining the value of a business;
2 companies can be identical in terms of turnover and activity during the comparative approach (which is not the case).
Other indicators to know
In addition to the most used ratios such as the PBR, the PER and the PSR, there are other indicators. They are mainly used to optimize the result of the valuation of a company . The principle of these ratios is often the same. It consists in determining average ratios based on comparable companies, or “peer group”, in order to evaluate a company.

The ratios best known by analysts and finance professionals are the capitalization ratio:

EBITDA: ratio between P and EBITDA without considering depreciation;
Capitalization of “cash flows”: ratio between P and CF or P and MBA;
On operating income: ratio between P and REX.

Valuing a business requires knowledge of accounting and/or finance . It is also necessary to master the various valuation techniques and ratios. To promote your business, it is therefore sometimes necessary to call on a professional.

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