What is the valuation of a company?
The valuation of a company consists in carrying out an evaluation of its economic value. This evaluation can concern the totality or certain assets of the company such as the goodwill or a part of the shares of the company.
Generally, the valuation of the company is requested in case of total or partial sale of the company or transmission of the shares. For example, in order to carry out a transfer of shares in a SAS, SARL or SCI, it is necessary to know the value of the asset transferred.
However, the actual price of the transaction does not necessarily correspond to the value retained during the valuation. The actual price is often the result of numerous negotiations.
What are the valuation methods ?
The calculation to value a company can be done according to different methods. We will deal here with the main ones.
First of all, the patrimonial method consists in evaluating on the one hand what the company owns (its assets) and on the other hand what it owes (its liabilities). This method of calculation has the merit of being simple, but it leaves out many criteria such as profitability. Most often, it is used to determine if the company is able to pay its debts thanks to its assets in order to direct the company towards an amicable liquidation procedure.
The comparative method, also known as the scale method, consists of comparing the value of the company being valued with that of another company.The comparative method, also known as the scale method, consists of comparing the value of the business being valued to that of another business of known value, operating in the same sector and with similar characteristics. It is particularly useful for determining the value of a craft business, as there are accurate statistics on the value of this type of business. However, while it can give an idea of the market price, it often results in a relatively wide price range. The comparative method can therefore be a good starting point, but it must be supplemented by other elements of analysis.
The yield (or profitability) method aims to extrapolate the current situation into the future. It is therefore a question of determining the projected profitability of the company. It is based on the company’s capacity to generate profits in the future while taking into account the risk of not achieving these profits.
In the same idea, we find the valuation by the forecasted cash flows also known as the cash flow method. Thanks to the business plan, it is possible to determine more or less precisely the expected cash flows over the next three to five years.
In addition to the valuation methods of a company, certain criteria must also be taken into account:
- the location, particularly for businesses and stores
- the general economic situation;
- the state of the market (analysis of supply and demand)
- the clientele;
- the reputation of the company
- its current strategy;
- the state of the production tool ;
- the social climate within the company;
- the importance of the manager’s personality on the company’s success.
All these elements can influence the value of the company upwards or downwards.
How to calculate the value of a company share?
Whether it is to proceed with the transfer of shares of a SCI or SARL to a third party or to another partner, it is necessary to estimate the value. Indeed, the nominal value, i.e. the one indicated in the articles of association when the company was incorporated, certainly no longer corresponds to the current value of the shares.
It is therefore necessary to proceed to the evaluation of the market value of the company’s shares.
This valuation can be done amicably following a negotiation between the seller and the buyer. It can also be carried out according to a calculation method specified in the articles of incorporation or within the framework of a judicial valuation by an expert mandated by the court.
As with the valuation of the company, the calculation of the value of the shares can be done according to the patrimonial, comparative or yield methods.
Who can determine the value of a company?
To value a company, it is preferable to call upon a professional. Moreover, a neutral person will be better able to value the company at its fair price. For example, you can call upon an expert in business valuation or your chartered accountant.
In order to know how to value a company, it is necessary to collect a lot of economic information, but also contextual and strategic information. Several methods can be used to calculate the value of a company. Generally, the experts use several of them in order to determine the most exact value possible.