Business valuation and acquisition
Business valuation is as much as art as it is a science. The value can be subjective and may depend on the purpose of the valuation, the methods used and the assumptions made. It can vary based on its purpose, and the entry or exit of a business partner is a typical scenario where valuation considerations might be slightly different.
What is business valuation?
Business valuation is the process of determining the economic value of a business or a company. It can be done for various reasons:
Five different business valuation methods
Valuation methods are crucial for estimating the worth of a business. While there are five methods to value a business, namely Capitalisation of Future Maintainable Earnings (CFME), Discounted Cash Flow (DCF), Net Tangible Assets (NTA), Industry method and Cost to create, the most common ones fall into two primary approaches: Capitalisation of Future Maintainable earnings and Industry method. Here’s an overview of these methods:
Capitalisation of Future Maintainable Earnings (CFME):
It is a popular income-based approach to business valuation. It involves determining the likely future profits of a business and then applying a capitalisation rate to these profits to arrive at a valuation. This method assumes that a business’s value is essentially the present value of its future maintainable earnings.
Discounted Cash Flow (DCF):
This is one of the most detailed and sophisticated valuation methods. It involves estimating the company’s future cash flows and then discounting them to the present value using an appropriate discount rate. This rate is often the company’s Weighted Average Cost of Capital (WACC).
Net Tangible Assets (NTA):
It represents the total value of a company’s physical assets (excluding intangibles like patents, copyrights, and goodwill) minus all its liabilities. In simpler terms, it’s what the company’s tangible assets are worth once all debts and other obligations are paid off.
Industry method:
It replies on the Comparable Market theory. To use it you must have large number of market participants, an active market for the buy/sell of these businesses, some level of public knowledge around pricing and a standard business model
Cost to create:
In the context of business valuation, it represents the expense associated with creating a particular asset from scratch, without restoring to purchase or acquisition. For Intangible assets, it assesses how much it would cost to recreate these assets without buying them. For tangible assets, the cost to create could mean the cost to build a similar facility, machine, or physical infrastructure
What is business acquisition?
A business acquisition refers to the process by which one company purchases most of all of another company’s shares or assets in order to take control of that company. Acquisitions are typically made as a part of a company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations and niche compared to expanding on its own.
The process of acquisition
The acquisition process refers to the series of stages that a company goes through to purchase another company or its assets. The process can be complex, involving various steps related to strategic planning, due diligence, financing, and integration.
Strategic Planning
Define the need for an acquisition and identify potential targets.
Initial Contact
Engage in preliminary discussions, sign a Non-disclosure Agreement (NDA), and maybe issue a Letter of Intent (LOI).
Due Diligence
Conduct a thorough review of the target’s financials, operations, legal standings, and cultural fit.
Negotiation
Agree on price, terms, employee roles, and integration plans.
Finalize Agreement
Draft, review, and sign the acquisition agreement.
Financing
Decide on the acquisition’s funding method.
Regulatory Approval**
Seek any necessary approvals from industry regulators.
Closing
Complete paperwork, transfer assets or stocks, and make payments.
Integration
Merge operations, systems, and teams.
Post-acquisition Review
Evaluate the success of the acquisition.
Acquisition methods
Asset Purchase:
The acquiring company buys the assets of the target company. This can include physical assets like equipment and property, as well as intangibles like patents or trademarks.
Stock/Share Purchase:
The acquiring company buys the shares of the target company.
Understanding acquisition
Here are some of the many reasons why an acquisition would take place: to expand market reach, gain a competitive edge, or access novel technologies and intellectual properties. Firms might also acquire to achieve economies of scale, diversify their product portfolio, optimize supply chain efficiencies, or tap into new geographic territories. Moreover, some acquisitions aim at talent acquisition, especially in industries where specialized skills are at a premium. Others might be driven by financial strategies, such as improving stock performance, optimizing asset utilization, or even averting potential business threats. In essence, the motivation behind an acquisition often mirrors a company’s broader strategic objectives and its vision for future growth.
How we can help you?
At MNY Group Chartered Accountants, we have a professional team with our expertise in financial analysis and deep understanding of financial statements, can play a pivotal role in the business valuation and acquisition processes.
Valuation Service
- Tax audit supporting document
- Shareholder dispute
- New partner/investor Succession
Due Diligence
- Financial Due Diligence: Scrutinize the target’s financial health, potential undisclosed liabilities, tax liabilities, and evaluate the accuracy of financial representations made.
- Tax Due Diligence: Review tax compliance, identify potential tax exposures, and ensure there are no hidden tax liabilities.
Negotiation Support
- Financial Insights: Provide critical financial insights that can shape the negotiation strategy, helping clients get favourable terms.
Deal Structuring
- Tax Optimization: Recommend deal structures that can minimize tax implications.
- Financial Structuring: Advise on optimal financing mix, leveraging debt, equity, or other financial instruments.
Integration Assistance
- Financial Integration: Guide the integration of financial systems, processes, and reporting.
- Tax Planning: Offer post-acquisition tax planning to optimize the combined entity’s tax position.
Negotiation Support
- Financial Reporting: Ensure that post-acquisition financial reporting meets accounting standards and regulatory requirements.
- Tax Compliance: Ensure the acquisition is compliant with tax laws and that post-acquisition operations adhere to tax regulations.
