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Financieel Management

Valuing a company is not an exact science. There are different valuation methods that may be employed: such as ‘discounted cash flow’ valuation based on projections of future cash flows and their risk and ‘price earnings ratios’ based on comparable quoted companies or those paid in comparable transactions.

Investors like to use performance and cash flow-related valuation ratios like ebit(d)(a) to total purchase price (including current debt), where ebitda stands for Earnings Before Interest, Tax, Depreciation and Amortisation (of goodwill).

The right price is essentially a matter of judgement and negotiation. It must be both acceptable to the vendor so that the deal can be done and such that the buyout financing model will work. With regard to the latter, too much debt may burden the company and too much equity may put shareholder returns under pressure. It thus follows that there is an upper limit on the price that can or should be paid for the business.

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