What you need to know about evaluation methods

Why evaluate a company?

Most of the time for the purpose of negotiating a sale or acquisition price. There is not one but several methods to evaluate a company, etc. The relevance of the methods largely depends on the characteristics of the company (activity in particular) and the evaluation context (shareholder conflict, Industrial group, etc.). Evaluation methods can be divided into two categories: intrinsic and analogue methods.

The intrinsic methods retain all the characterstics specific to the company, which allow it to generate a monetary surplus in the future, or simply put: cash. The most widely used intrinsic method is that of discounted free cash flows (D.C.F in French). The analogue methods aim to apply to the evaluated company one or more criteria (profitability etc.) from one or a group of reference companies. The two most commonly used analog methods are the ones that hand out multiple of operating results (E.BI.T) and net and on the other hand comparable transactions.

Schematically, the discounted cash flow (D.C.F.) method consists in discounting free cash flow (F.C.F.). Free cash flows are calculated from a business plan. The discount rate corresponds to the weighted rate of return required by capital investors (shareholders) and lenders of money (bankers, etc.).

It is also referred to as the weighted average cost of capital (WACC). The main difficulty in the WACC is the cost of capital (or rate of return required of shareholders). The latter is calculated using the capital asset pricing model (CAPAF, Capital Asset Pricing Model (CAPM) translation).

Schematically, the method of multiples of operating income and net consists first of all of selecting one or more companies listed on the stock exchange and then determining the multiple of operating income and / or net income (market capitalization / Result) and to apply these multiples to the results of the company or company concerned).

Let us give you some advice, what is the easiest method to evaluate?

It is, all things being equal, the method of stock exchange comparisons. But it is the least relevant, because it is necessary to find truly comparable listed companies. This may lead evaluators to discard this method. The DCF method is more difficult to implement but is rarely impertinent. In other words, this method is almost always adopted. What is the best way to evaluate a retail business? In fact, practices in this area retain comparable transactions. Most of the time, the prices of the latter are expressed in% of the turnover over the last three years. However, comparison is not always right. Ultimately, it is always the intrinsic elements, ie the future beneficiary capacity of the fund that must take precedence. Under these conditions, it is advisable to pay attention to all the elements likely to affect the value (future investments to be envisaged, modification of the local factors of commerciality, etc.).