+372 502 5425 info@sentio.ee Print

Company valuation

If you are planning to sell or buy a company, raise additional equity, consider a potential merger, or just want an estimation of your company’s valuation – we can help you with determining a fair value of the business. Knowing the value of an enterprise together with understanding the factors influencing it, as well as the trends and scope of these factors, is strategically important for the company’s management and owners.

Sentio performs company valuations using a variety of valuation methods that are proven and accepted by the industry. These valuation methods could be used on a stand-alone basis or in combination to provide additional robustness and give insight from different perspectives.

Earning approach:

  • Discounted Cash Flow (DCF) method
    Discounted Cash Flow method is the most widely used company valuation method that is also recognized in Estonian law practices. To apply this method, a valuation model projecting future free cash flows is built based on the historical financial statements and estimates, as well as a market outlook provided by the company’s management. After these projections are in place, projected free cash flow is converted from the future to a net present value. This is done by applying the discount rate, which is based on the discount period and the estimated company-specific weighted average cost of capital.
  • Dividend Discount (DDM) method
    As an alternative earnings based approach to assess the company’s value, Dividend Discount method could be applied. In this case, the fair value of the company’s shareholding is determined by building a model that estimates the total value of potential cash flows for the ultimate beneficiary owners by adding up the present value of all prospective future dividends. Similarly as with the DCF model, the Dividend Discount model relies on the input from the company and the management, as well as publicly available data, research and previously acquired market knowledge.

Market value approach:

  • Trading Comparables method
    The Trading Comparables method (also known as the Trading Multiples approach) assumes that the company´s enterprise value can be derived from relative comparison with similar public companies that are actively traded on stock exchanges. The more similar the size, product range, location and other characteristics of the comparable peer group to the company, the more accurate enterprise value estimations are considered to be attained. For this type of firms, the most common multiple to be compared is Enterprise Value / EBITDA, however, Enterprise Value / EBIT and Enterprise Value / Sales are often also considered.
  • Precedent Transaction Analysis method
    The method of Precedent Transaction Analysis (also known as Transaction Comparables) is somewhat similar to the Trading Comparables approach. The difference is in the fact that the multiples used to estimate the value of a company are not derived from the market values of listed companies but instead from the recent M&A transactions with similar companies that have taken place. The method is considered relatively accurate when there are sufficient comparable transactions. However, in most cases there are relatively few relevant transactions with companies of a similar size and field. Also, typically the terms and conditions of purchase and sale transactions in Estonia are kept confidential between the Buyer and Seller. This limits the data availability, and hence, the accuracy of this approach.

Asset based approach:

  • Modified Book Value method
    The Book Value is a simple approach in which the value of a company’s equity is based on the accounting values. The disadvantage of this method is that the book values of assets  may differ significantly from the market values, as the plant, property & equipment in accounting are greatly influenced by the management’s decisions regarding the company’s  accounting policies. For example, book values can be manipulated by altering the depreciation rates on fixed assets and by writing off or revaluing assets. Therefore, Sentio considers this method to be inaccurate with low informational value. 
  • Replacement Value method
    Another alternative is to evaluate the company´s asset base according to the replacement value of its net assets. This approach is based on the assumption that the investor is not willing to pay more for the company than the cost of its assets. In case the company is taken over with its liabilities, debts and other obligations should be deducted from the replacement value of the asset base. Although it is a relatively simple approach, it does not take into account any potential synergies, intangibles or growth opportunities. Hence, this method is considered to be rather impractical in assessing the market value of successful companies. 
  • Liquidation Value method
    In case of companies with loss-making operations, the liquidation value may be considered. The liquidation value indicates the estimated price of the company’s assets on the secondary market and is often considerably lower than the replacement value, especially if the company´s asset base is highly specialized or even customized especially for this specific company. For companies that generate positive operating cash flow, Sentio considers usage of the Liquiditation Value method to be unjustified. 

When assessting the company’s value it is important to consider that each company is somewhat special with its own nuances that should be factored into the valuation. For an accurate result, the chosen valuation approach has to be relevant and valuation model assumptions have to be adequate for the given company. Sentio is kindly willing to assist in the selection of an appropriate valuation method(s) and in developing a company-specific valuation model. For an indicative offer, please send an email with a brief description of the company or its latest annual report to the following address: info@sentio.ee.

Sentio notes that while these valuation methods can be useful as a reference point, at the end of the day a company’s market price is determined by what a buyer is ready to pay for it. There are a wide range of factors both on and off the balance sheet affecting the value of a company for a particular buyer. Based on Sentio’s experience, strategic investors are often willing to pay a higher price than financial investors as they may see additional value in potential synergies.

Please see our selected references:

Company valuation