Back in college, one of the best teachers I have ever had taught us one of the key principles of any good economist: - Whenever somebody asks you about economics, your first answer should always be ‘‘it depends on…''. - . I will not start elaborating on the positive aspects of this formula, but rather use it as the initial answer to the question mentioned in the above title. It depends on your current results, on your future business plan, it depends on the degree of interest you have in selling, on your sector of activity..., on so many factors that it would be too long to state them all, and much more to explain each in details.

I will then rather set off by giving you a typical consultant advice: turn to a professional who can analyse your situation in depth. Only this way will you be able to get a personalized answer to that main question.

Nonetheless, I wish to provide you with some guidelines that will allow you to define certain initial limits of the price you can hope to get for your company. Better said, I will try to help you define what price you should not expect for your company.

The main accounting and financial factors involved in the determination of the price of your business are the following:

•  by definition, historic profit & loss account of your company will play an important role, especially if available data covers a sufficient period;

•  the future capacity to generate liquidity (measured using concepts such as future cash-flow and EBITDA) is strongly relevant;

•  the valuation method chosen also has a considerable impact on the final result, since each method emphasizes on different factors judged more important in the elaboration of the price, which value will then vary accordingly;

•  further revisions by financial, legal and process auditors (known under “Due Diligence”) can help detect potential present and future risks, which will also impact on the final price.

However, there are other types of much more subjective, but as important characterizing factors in the search for a price range, such as:

•  the environment and competitive situation of the company at the moment;

•  the current situation and potential evolution of every investment tool in the financial market, in the case where potential buyers/investors can see the evolution of their money while competing in a direct o indirect way for those funds;

•  the personal and professional status of the company's property;

•  the management team, or better said, people forming part of it;

•  the ultimate price of companies equivalent in terms of operations, and of similar characteristics;

... and many others that I deliberately do not mention in order to remain brief.

That being said, I understand that somebody, while reading these lines, might ask himself or herself if it is really possible to reflect the value of a company with precise numbers. Once price is fixed also other questions come to us such as: Is there a market for this type of transactions? Which one? How to reach it?

It is actually possible to establish the price in details, and in advance, to prepare for the opening of negotiations with a potential buyer. This does not imply that it will be our final and definitive price, since it is known by experience that there are various existing premises that rather value arguments to convince their counterpart. Moreover, the way to value a business is in constant evolution with a notable tendency to favour financial approaches.

In short, those objective prices calculated by each party can never really be considered as definitive, but are rather tools allowing each party to determine if a future agreement would generate enough margin for all. Just as we have said before, the final price will come up as a balanced average, and can also vary under the effects of a multitude of factors.

We are aware that, until now, we have not been offering any mathematical solution to allow anybody find a price. Without entering too much into details, and without claiming to be foolproof, here are some of the guidelines you can follow to find out how much you can expect to get for your business.

l) Sales are nothing of a valid reference to predict this price. Who can claim not to know any company which sells a lot and still registers losses? Would you be willing to pay a big price for such a company?

ll) The value of the assets of a company is also a wrong indicator, unless the valuation method chosen is static. Experience tells us that a company is seldom sold according to its balance. If such a case was possible, it would rather be that the balance is used to help better justify the price, but almost never is it used to determine a concrete amount.

lll) Although it might seem surprising, the profit and loss account is not a reliable reference either, since arguments used to define accounting concepts are hardly applicable to the notion of a company's real value. The most usual example is amortization, which lowers accounted profits without involving a tangible expanse.

lv) To relate to the previous point, concepts such as EBITDA (and its different corrections according to the method) reflect much better the real value of your business.

v) Variables more closely related to the financial strategy of your company such as payment (to suppliers) and collection (from client) terms, as well as the extend of debts of your company, are also used to determine your business value.

To resume all this in a single statement allowing us to answer this article main initial question, we could say the following:

In the end, your company, similarly to other possessions, is worth what one would be willing to pay for it. Nevertheless, there are some commonly homologated and accepted mathematical methodologies used by professionals to find the value of companies in an objective (although not infallible) way. The found price is used as a starting point for negotiation, and will fluctuate following the incorporation and evaluation of multiple subsequent factors.

We regret not to be able to provide you with a more scientific scheme, but if you think about it, is there actually somebody able to precisely define the value of a work of art by Picasso? or of the Eiffel tower? This is related to the fact that the price of a work of art, similarly to the one of a company, is influenced by the power of subjection of feelings, requiring that each and every of its element be meticulously considered. All this is neither simple and quick, nor mathematically exact. For this reason, as I mentioned before, you should preferably rely on professionals of the sector. Not only can they help you determine the searched value, but also can they insure efficiency in the realization of the transaction.

Antonio Valverde
Economist - Corporate Finance Department
AGM ABOGADOS