How is a company’s value determined in M&A?

To achieve the best deal for your company, you need to make sure that cash flow (EBITDA) and business value are optimal at the time of the sale. These two parameters are guaranteed to have a positive effect on the price you will receive for your company. Find out what else affects your proceeds directly or indirectly in this article.

We usually calculate the value of a company based on EBITDA – earnings before interest, tax, depreciations and amortisations – and the multiple. The multiple is the factor EBITDA is multiplied by. For example, if your company has an EBITDA of 850,000 euros and a 3.6 multiple applies, the estimated company value amounts to a little over 3 million euros. The multiple is based on several indicators, such as company size (number of FTEs), sector and recent business acquisitions. The Marktlink Multiple offers you a reliable indication of the value of your business safely, quickly and simply. To go from company value to purchase price, we take cash and debt items into account as well.

Starting in time is the main piece of advice if you want to sell your company. On average, preparing will take two years. One thing you need to arrange, is an accurate insight into figures with respect to accounting, sales and marketing. These figures are required to create a solid future outlook, to identify growth potential and to budget two to three years ahead. Additional aspects contributing to a higher company value are predictability, scalability and flexibility. Think of a stable source of revenue, such as contracts or subscriptions. A scalable company can increase revenue without this leading to issues in the internal organisation. The degree of flexibility, in turn, determines how quickly you can scale up or down your business, with respect to both revenue and costs.

In various ways, dependency plays a role in determining the value of your business in a sale process. Having a broad customer base is an advantage and ensures your profitability, should a customer leave. Dependency is also at work if you have only one supplier, certain knowledge lies with a single employee or if you as owner-manager have too large a role in the business. As you are working towards an exit, our advice is to shift to working on, rather than in your company. This is sure to contribute to the final result: the deal of a lifetime.