The valuation of companies in M&A

The interest in closing M&A transactions generally depends on the results of the valuation of the target company, in which a balance between a quantitative and qualitative analysis should always be considered.

To determine the value of a target company, its future cash flow is considered a vital element. However, it must be taken into consideration that potential buyers have different business visions and interests, and therefore, also different plans for the target in the event of closing an M&A transaction. Thus, there are those who may be interested in acquiring the company for its entire operation to continue its exploitation and generate assets; others who only want to obtain a benefit with respect to a certain part of the company’s assets, such as Intellectual Property rights; and finally, those who are only acting as a preventive measure so that the target is not acquired by one of their competitors. The conclusion? The valuation elements will always depend on the motivations of the parties related to the transaction.

There is not a single or perfect method when it comes to companies’ valuation. Over the years, lawyers, accountants, and other specialists in the area have used and complemented different methods, which, as already mentioned, must consider quantitative and qualitative elements, whose balance and areas of interest will depend on the parties. It is clear that each of the methods used can lead to conclusions that, although not distant, are different regarding the value of a company. The foregoing, when time and money are involved, can actually be beneficial, since it allows discrepancies between the different results to be visualized and analyzed in order to determine the best valuation.

The value that is obtained by the specialists is considered “objective” and it is generally not an isolated conclusion for the determination of the final price, since there may be different valuation conclusions, but the price is only determined by the parties, which will also be subject to their considerations during the negotiation process, the “subjective” values.

Now, it is worth mentioning that the success of the transaction will generally depend on the information obtained, and therefore, on the knowledge of the target company. It is necessary to know the business and its organizational culture, the modus operandi of its employees and managers, its environment and evolution, and only in this way will it be possible to have more certainty about the valuation carried out and therefore, foresee the assets to be obtained from it.


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