Business valuation: from calculated value to the price you actually bank

A valuation that stops at a number is only half done. Between the theoretical value of a business and the net amount its owner will receive at completion lie adjustments, methods, price-adjustment mechanisms, deal structuring, tax and warranties. Each of these layers can create or destroy more value than a full turn of multiple. Here is how we deal with them, in the order in which they arise in a transaction.

The first source of misunderstanding in a negotiation is not the amount: it is what the amount refers to. Four concepts need to be distinguished from the outset.

Enterprise value measures the economic activity, regardless of how it is financed. Equity value — what the shareholder receives — is derived from it by deducting net financial debt and treating surplus cash, shareholder loans, provisions and debt-like items. The offered price then reflects bargaining power, synergies and deal structure. And the seller's net proceeds take account of tax, fees and the deferred part of the price.

Several parameters also move the result significantly:

• Value of 100% versus value of a minority stake — a control premium rewards decision-making power; a minority discount penalises its absence.

• Standalone value versus strategic value — the latter includes the synergies available to a given buyer; it differs from one buyer to another, which is why running a competitive process matters.

• Value at a given date — the price moves between the reference date and completion, under mechanisms that must be drafted precisely (see how the price becomes final at completion).

The multiple is applied to an EBITDA figure — but which one? An SME's reported EBITDA reflects management choices — the owner's pay, rent paid to a family property company, management fees, personal expenses, one-off items — that say nothing about the performance a buyer will actually acquire.

Normalisation systematically adjusts for: the owner's remuneration brought into line with market levels, rent and intra-group transactions restated at arm's length, non-recurring income and expenses, and the treatment of finance leases and rental agreements. A gap of 15 to 25% between reported and normalised EBITDA is common — and it flows straight through to the price via the multiple.

The normalised figure is then analysed over time and in substance:

• Historical, current and forecast EBITDA — the trajectory matters as much as the level.

• Cash conversion of EBITDA — EBITDA that does not turn into cash is worth less; recurring maintenance capex and any investment backlog are quantified.

• Normalised working capital — the level of working capital the business needs, taking seasonality and cyclicality into account. Working capital can also be optimised before the deal: factoring and reverse factoring reduce receivables and payables, and therefore the net debt taken into account in the price.

• Off-balance-sheet commitments, disputes and contingent liabilities — identified before the buyer's due diligence finds them.

No method gives you “the” price. The strength of a negotiating position lies in several approaches converging, each relevant in its own field.

The company's previous funding rounds or share transactions provide a further reference point. Everything is then weighted and reconciled into a range, backed by sensitivity analyses on EBITDA, multiples, growth and the discount rate: knowing how far value moves when an assumption moves tells you where the negotiation will be fought. Multiples are not stable over time: an economic downturn compresses them and shifts bargaining power — the timing of the deal is itself a valuation parameter.

At equal EBITDA, two companies are not worth the same price if their revenue is not of the same quality. It is the first thing a serious buyer analyses — and therefore the first thing a well-advised seller prepares.

• Customer concentration — revenue split by customer, reliance on key accounts, risk of customers leaving on a change of shareholder.

• Recurrence — share of recurring or contracted revenue, contract length and renewal, termination clauses, churn rate.

• Loyalty — length of relationships, retention rate, personal-reliance contracts or change-of-control clauses that weaken the transfer.

• Granular profitability — by customer, product, business line and region: averages often hide a mixed picture.

• Visibility — quality of the order book and sales pipeline, reliance on a single market, distribution channel or introducer.

Each of these points is documented before the deal. An analysed, contracted and secured customer portfolio commands a higher price — and, above all, it is paid in cash rather than through an earn-out.

Every buyer's central question fits in one sentence: can the business run without its founding shareholder? Everything that depends on the answer has to be prepared, sometimes several years before the sale.

These criteria are not theoretical: they are exactly the grid a buyer applies to assess an acquisition opportunity. Reading it from their side of the table is the best way to prepare yours.

A buyer pays partly for prospects. Those prospects still have to be credible — and paid for at their fair share. Two requirements shape this workstream.

Credibility. Consistency between historical performance and forecasts, justified revenue and margin growth assumptions, order-book visibility, future hiring, capex and working-capital needs quantified, execution risks identified, and a management team with a track record of hitting its targets. A business plan is presented in three scenarios — prudent, base case and ambitious — because a single scenario is not a forecast, it is an argument.

Fair allocation. Separate the value attributable to performance already secured — paid in cash — from that of prospects that remain uncertain — which can be structured as deferred consideration. This boundary is one of the main battlegrounds of the negotiation; drawing it yourself before the buyer does is a decisive advantage.

Between 4 and 8 times EBITDA, the gap is not decided at the negotiating table: it is decided by the characteristics of the business. The good news is that most of them can be worked on in advance.

Two offers at the same headline price can represent very different real values depending on their structure. The available building blocks can be combined:

Between agreeing the price and completion, the business carries on: its cash, debt and working capital move. Two mechanisms govern how the final price is set.

In both cases, three contractual definitions account for most of the differences: net financial debt (what goes into it?), normalised working capital (what reference level?) and the treatment of payments to the seller before completion — dividends, distributions, shareholder loans. Add to this leakage protection and the allocation of transaction costs and any deal-related debt. Every poorly defined term is a point of price that will be reopened at the worst possible moment.

Two offers at the same headline price can represent very different real values depending on their structure. The available building blocks can be combined:

Everything the buyer's due diligence uncovers will be turned into a discount, a warranty or a condition. The answer is simple in principle: run the exercise on yourself, first.

For the same business, the process makes the price. Here is how we run it:

Signing does not close the matter for the seller — especially if they retain shares or support the transition. To be negotiated before, not after:

We are an independent advisory firm for acquisitions, sales and financing, based in Marseille and working across France and internationally through a network covering 120 countries. The firm is registered with ORIAS, the French register of insurance and banking intermediaries, under number 25000696 as a broker in banking transactions and payment services (IOBSP).

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