Why is company valuation important?

Valuing a company is not an exact science. Even so, it is the starting point for selling calmly and judiciously, as it helps set expectations, defines a reasonable range and guides the negotiation. In a valuation, the final price is set by the market when the sale process is well prepared and well managed.

What is company valuation?

The valuation is an estimate based on available information and future business expectations. It does not attempt to guess the exact price, but rather to organise the conversation: what range makes sense, which variables carry more weight (growth, margins, necessary investment) and which parts of the business need to be explained in more detail.

In Business Valuation the M&A Academy section, you will find all the information you need for this process.

Diferencia entre valor y precio

We often encounter cases where these two terms are confused, but the truth is that they are not the same thing:

• Value: this is an informed opinion. It varies depending on who is looking at the business and what they plan to do with it. A buyer who can merge your company with theirs and save costs or increase sales will see it differently than an investor seeking profitability without change.
• Price: this is the actual amount paid when the transaction is closed. It is a fact, not an opinion.

Our advice as specialists in the sale and purchase of companies is that you work with ranges rather than a single figure. If you are interested in learning how to carry out this process, here is a guide to valuation methods. We also leave you with two other complementary articles with concepts you should take into account when evaluating a company:

• How to perform a company valuation using discounted cash flow
• How to perform a company valuation using multiples

Does the valuation change for listed and unlisted companies?

Yes, the valuation differs between listed and unlisted companies due to certain factors:

1. Strategy: In a listed company, the investor buys ‘as is’, without the ability to redesign the business. In a private sale, the buyer usually thinks about how to fit your company with theirs to create additional value (savings, cross-selling, new capabilities).
2. Effect on accounts: purchasing an entire company changes the picture of the purchasing group (assets, debts, equity). Purchasing shares on the stock market is generally recorded as an investment and does not alter that picture as much.
3. How the price is set: on the stock market, the price is set by the market every minute. In a private sale, there is negotiation: the scope of what is being purchased is defined, adjustments are agreed upon (e.g., debt and working capital), and how and when payment will be made is agreed upon.

If you want to delve deeper into the practical side of things, we recommend taking a look at this article on ales negotiations in the M&A process. In it, we break down details such as the correct structure to follow in a transaction and the best strategies for success.

Valuation as a negotiation tool

Valuation is useful for structuring the transaction, not just for ‘putting a number on it’.

• Set a reference range. This will allow you to talk to various interested parties without feeling constrained.
• Clear settings. Agree on how debt, working capital and minimum investment affect the business.
• Pricing mechanism. You can choose between adjusting the price with the ‘final snapshot’ on the closing day or setting a price from a past economic date with adequate protections.
• Payment method. Combining an initial payment, deferred payments and variable payments based on results helps to spread risks and align interests.
• Documents and pace. Consistent information, realistic timelines, and competition among stakeholders often result in better terms.

If you are unfamiliar with these terms, here is a guide where we discuss the most important aspects of negotiating a letter of intent.

The type of investor affects the final price.

The type of investor also has an impact when establishing the final price in the company valuation process:

• Companies in the sector (strategic buyers). They may pay more if joining your company with theirs brings clear benefits: cost savings, access to new customers, product reinforcement.

• Investment funds. They seek clear profitability with financial discipline. They tend to value the business ‘on its own’, without counting on external synergies, but they can offer flexible payment structures.

To understand the differences and which option may best suit your goals, here is a guide to the different types of investors: Strategic partner or financial investor?

If you are considering selling your company and, after reading all this information, you need personalised advice, please do not hesitate to contact our advisors who specialise in the sale and purchase of companies in the technology sector. They will provide you with a tailored valuation so that you can make the best strategic decisions.

If you prefer, we also invite you to watch this webinar where we talk to our experts about the importance of company valuation in the sales process: