Valuing a company is not just a matter of applying a formula to a spreadsheet. Nor is it enough to look at the balance sheet, multiply EBITDA by a coefficient or use as a reference what someone might be willing to pay in a specific negotiation.
The value of a company depends on many factors: its real capacity to generate profits, its market position, the quality of its assets, its level of debt, its legal risks, the stability of its customer base, the sector in which it operates and, very importantly, the purpose for which the valuation is being carried out.
Valuing a company for a sale is not the same as valuing it for the exit of a shareholder, a family business succession, a capital increase, a restructuring process or an assessment of viability in a context of financial tension. In each case, the underlying question changes. And when the question changes, the approach must change as well.
One of the most common mistakes is to assume that the value of a company is faithfully reflected in its annual accounts. Financial statements are essential, but they do not always show everything that matters.
The balance sheet can say a great deal about a company, but it can also hide significant differences between book value and real economic value. This is particularly clear when the company owns real estate assets acquired many years ago.
From an accounting perspective, properties are usually recorded at their acquisition cost, with the relevant adjustments, including depreciation and possible impairment. This means that a warehouse, commercial unit, plot of land or building purchased twenty or thirty years ago may appear on the balance sheet at a value far below its current market value.
The opposite may also occur: a property may be recorded at a value that is no longer recoverable if the market has changed, if the asset has deteriorated or if its economic use no longer justifies that valuation.
That is why, in a serious valuation, the balance sheet must be read carefully, but not accepted without further analysis.
In family businesses, holding companies, hotel businesses, industrial companies, construction firms, long-established retailers or companies that own their premises, real estate assets can have a decisive impact on the valuation.
A company may have modest operating profitability but hold very significant real estate assets. It may also be the case that the business is performing well, but its assets are overvalued, incorrectly classified, encumbered by charges or linked to debts that materially reduce the net value.
In these cases, several issues should be reviewed.
The first is the difference between book value and market value. Book value may be far removed from reality if the property was acquired a long time ago. This does not mean automatically “revaluing” the balance sheet, but rather adjusting the economic valuation of the company in order to understand what assets actually exist.
The second is the existence of charges, mortgages, guarantees, planning restrictions, leases or limitations on use. A property free of charges does not have the same value as one linked to significant debt or subject to a contract that limits its use.
The third is the usefulness of the asset for the business. A property that is necessary for the company’s activity is not the same as an asset that is surplus, idle or available for sale. In a company valuation, the property must be analysed within the logic of the business, not in isolation.
The fourth is the possible existence of impairment. In practice, this requires asking whether certain assets are correctly valued or whether adjustments are needed in order not to build the valuation on figures that are not realistic.
There is no single valid system for valuing a company. It is common to use several methods and compare the results. Each method sheds light on a different part of the company’s reality.
Book value starts from the equity shown in the accounts. It is a basic reference, but it is usually insufficient.
Adjusted book value seeks to correct this limitation. To do so, assets and liabilities are reviewed in order to bring them closer to a more reasonable economic reality. This is where adjustments may be made for real estate assets, inventories, doubtful debts, unrecorded liabilities, contingencies, insufficient provisions or assets that no longer have the value shown in the accounts.
This method can be useful for companies with substantial assets, family-owned companies, real estate companies or businesses where assets weigh more heavily than the ability to generate profits. But it should not be used in isolation where the company has a significant operating business.
The multiples method compares the company with similar transactions or businesses. For example, a multiple may be applied to EBITDA, revenue or other financial indicators.
This method is widely used in company acquisitions because it connects with the logic of the market: how much is being paid for similar businesses. However, it requires caution. Two companies in the same sector may have very different risks.
A company with a diversified customer base is not worth the same as one that depends on two key accounts. A company with a solid management team is not worth the same as one that depends heavily on its founder. A company with properly documented contracts is not worth the same as one operating with verbal agreements, latent disputes or unclear margins.
A multiple can provide guidance, but it does not replace analysis.
The discounted cash flow method is based on a simple idea: a company is worth what it is capable of generating in future cash flows.
It is a technically robust method, but highly sensitive to assumptions. Small changes in sales forecasts, margins, investment requirements, debt, discount rates or future growth can significantly alter the result.
For that reason, this method requires a sound understanding of the business. It is not enough to project numbers. It is necessary to understand whether sales are recurring, whether contracts are stable, whether costs are under control, whether the company depends on key people, whether the market is growing or mature, and whether the company has the real capacity to sustain its forecasts.
In growing companies, this method can be particularly useful. But it can also produce artificial valuations if projections are too optimistic.
Liquidation value answers a different question: how much would remain if the company ceased trading, sold its assets and paid its debts.
This approach is relevant in situations of crisis, insolvency, serious shareholder disputes or the analysis of strategic alternatives. It does not always represent the value of a going concern, but it may be essential to understand the economic floor of a negotiation.
In some cases, the value of the business as a going concern will be higher than its liquidation value. In others, especially where the activity is destroying cash or depends on assets that can be sold, the comparison may be decisive.
Valuing an industrial company is not the same as valuing a hotel business, a holding company, a technology company, a construction firm or a distribution company.
Each sector has its own economic rules. In some businesses, real estate carries more weight. In others, the key value lies in the customer portfolio, brand, team, technology, licences, location, contracts or commercial capacity.
In Mallorca, for example, many companies are directly or indirectly connected with tourism, real estate, construction, retail, auxiliary services, logistics or family business. In these sectors, a valuation cannot be separated from the local context, seasonality, financing costs, dependence on certain customers or market evolution.
A company may appear profitable in a good year and be much more fragile when full business cycles are analysed. That is why a valuation must look beyond the latest financial year.
A valuation should not be limited to numbers. Legal risks can directly affect the value of a company.
A shareholder dispute, poorly drafted contracts, significant unpaid debts, pending litigation, personal guarantees, debts with public authorities, dependence on administrative licences or a lack of proper corporate documentation can reduce value or condition a transaction.
It may also be the case that a company is worth more than it appears, but that value is not easily realisable because there are shareholder deadlocks, lack of clear agreements or family disagreements.
In these cases, value does not depend only on what the company is worth “on paper”, but on whether that value can be converted into a viable transaction.
A valuation is not always intended to set an exact price. Very often, it is used to structure a negotiation or support a decision.
In the exit of a shareholder, it helps avoid purely emotional positions. In a family business, it helps separate assets, business and expectations. In an acquisition, it helps defend a reasonable range. In a crisis situation, it makes it possible to compare alternatives: continue operating, sell assets, restructure debt, seek investors or prepare an orderly exit.
For that reason, a good valuation should not end with a number alone. It should explain the assumptions used, the risks identified, the adjustments made and the reasonable room for negotiation.
The purpose of valuing a company is not to obtain an apparently precise number. It is to understand what lies behind that number.
A useful valuation should help the business owner, director or shareholder answer specific questions: what the company is really worth, what part of the value depends on assets, what part depends on future profits, what risks may reduce the value, what adjustments should be made to the accounts and what decisions should be taken before entering into a negotiation.
At Capllonch Advocats, we work with companies that need legal judgement and business perspective in moments of growth, tension or conflict. In a company valuation, that combination is especially important: numbers matter, but so do the legal, corporate and strategic consequences.
Before accepting a figure, discussing the exit of a shareholder, selling a stake or making a significant decision, it is advisable to review the company methodically. Because a poorly approached valuation can not only distort the price. It can also lead to the wrong decision.
If you need to value a company, review the exit of a shareholder or analyse a corporate transaction, request a meeting with Capllonch Advocats to assess the case with legal and business judgement.
