Valuing a Company for Acquisition

Valuing a company for acquisition does not only pertain to the price. There are several factors to consider determining the value of the company.

Buyers should concentrate more on the future results instead of focusing the past.

Owning a new business is not that easy as you need to consider several factors that affect the acquisition of a new business. If you are planning to acquire business you should pay attention on its value. Nevertheless, determining the value should not only concentrate on the past history of the business but also in the future of the business. Although evaluation of the financial history of the business is needed you should also consider the factors that affect the company’s revenue. Likewise, you should pay attention on the future income of the business when determining the acquisition value.

Keep in mind that regardless how strong the revenue streams of the company there is a tendency to falter when it integrates into a corporation. You should anticipate that the revenue would change after changing of ownership and never ignore the possibility of revenue declination. In this sense, acquirers should develop effective financial projections.

What to Do In Valuing a Company?

  • Determine the future cash flows of the company you want to acquire.
  • Determine if incorporating the business would have positive effect on the cost of capital as well as future revenue of the business.
  • Determine the amount payable when acquiring the target company. You should not pay higher price unless it offers synergy values.

Before you decide to acquire new business make sure to have good understanding about future strategic plans. Aside from the estimated cash flows you should also think about the cash outflows that would be incurred in case of new debt. Likewise, you should estimate the cash flow by analyzing the NPV changes. You can employ tree model that can help in determining the expected value from the various possible values.

Possible Values to Consider

Future performance is one of the important factors to consider when determining the value of a company. In this way, you should not only focus on the past history of the business but you should focus also on the current condition of the business. This is because the present condition affects the future performance of the business. Likewise, the value of the business would change according to the expectations of the buyer.

Another factor is the financial leverage. Keep in mind that higher financial leverage would mean lower average cost. In case of low financial leverage buyer would have lesser chance to borrow financing resources. Aside from that there are other factors that affect in determining the value of the company such as financial return expectation, cash flow, deal structure, asset type, exit strategy and the debt paying ability.


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