In the process of mergers and acquisitions (M&A), the acquired party wants to sell more and the acquirer wants to spend less.

But whether it's to buy more or spend less, both sides need to have a solid basis for the game.

The method by which a relatively reasonable company value is determined is a key point for both sides of the merger.

Company valuation, that is, the assessment of the value of the company, is a process of analyzing and estimating the value of the company's comprehensive assets and interests.

At present, the internationally accepted valuation methods are mainly divided into three categories: income method, cost method and market method, which are also generally recognized and adopted in our practice.

1. Cost Approach

The cost approach refers to the determination of the value of a target company by reasonably assessing the value of its assets and liabilities on the basis of its balance sheet.

In layman's terms, it is the replacement price of an asset or the price of purchasing a substitute for the same use. Therefore, the main valuation method of the cost approach is the replacement cost method.

Replacement cost method:

Based on the inventory and verification of each asset, each identifiable asset is evaluated one by one, and it is confirmed whether there is any goodwill or economic depletion in the enterprise.

The evaluated value of each single identifiable asset is summed up and then added to the goodwill of the enterprise or subtracted from the economic depletion, and the evaluated value of the enterprise value can be obtained.

The replacement cost approach, at its most basic level, is similar to the equation 1+1=2, where the value of the business is the simple sum of the individual assets.

The advantages of this method are outstanding, concise and easy to operate.

But at the same time the shortcomings are obvious: it does not take into account the company's future growth, the cash flow it can bring, and other factors; at the same time, it ignores the synergistic effect and scale effect between different assets.

Because in the process of business operation, often 1+1>2, the overall value of the enterprise is greater than the sum of the assessed value of individual assets.

Based on past practical experience, the replacement cost method is generally used in the restructuring process of state-owned enterprises and will be traded with reference to the appraised value of the net assets of the enterprise.

Because many Internet companies are asset-light companies, relying on creativity or models that are not worth much if viewed from an asset perspective.

So, light-asset companies, including Internet companies, rarely use the cost method of valuation, and use the market method or income method of valuation, which better highlights its growth and the cash flow it can bring in the future.

2. Market Approach

The market approach is to compare the appraisal object with a reference company or an asset transaction (business, shareholders' equity, securities, and other equity assets) that has already been traded in the market, in order to determine the value of the appraisal object.

It is based on the assumption that in a complete market, similar assets must have similar transaction prices.

Commonly used methods in the market approach are the reference company comparison method, the M&A case comparison method and the price-earnings ratio method.

Reference Enterprise Comparison Method, M&A Case Comparison Method:

Taking the benchmark object of the appraised enterprise in the same or similar industry and status, the appraised object's value is arrived at by obtaining its financial and operational data for comparison and analysis, multiplying it by the appropriate value ratio or economic indicator.

But in reality, it is difficult to find a benchmarking object that is in the same or similar industry as the appraised enterprise, and the empirical data that can be used for reference is very limited.

Therefore, it will have a certain impact on the accuracy of the valuation results, but entering the era of big data, through the collection and application of big data, it will help to improve the accuracy of the valuation results.

Price-to-earnings multiplier method: price of the appraised company's stock = average price-to-earnings ratio of the same type of company's stock earnings per share of the appraised company's stock.

It is specialized for the valuation of listed companies.

For example, if a company listed on the GEM board has earnings per share of 1 yuan, and the average P/E ratio of the same type of listed companies is 30 times, then its price per share is 30 yuan.

In practice, many acquisitions of unlisted companies also refer to this method.

The advantage of this method is that there is a referable object, there are referable data.

But, after all, the acquired company is not a listed company, so accordingly in the valuation to be discounted, how much discount, there is a lack of basis.

So, such valuation method can be used as a reference, and income method for comparison and corroboration, to negotiate to determine the final valuation.

3. Income Approach

The income approach is based on the future earnings of an asset, according to the formula back to its present value.

This means that the present value of an asset is determined by its future earnings.

The main methods of the income approach include the discounted cash flow (DCF) method, the internal rate of return (IRR) method, the CAPM model and the EVA valuation method.

In practice, this method needs to rely on the measurement of future company cash flows, earnings.

This valuation method takes into account the company's future growth and future value factors, which is very suitable for high-growth companies such as Internet and high-tech.

So the valuation is generally higher.

The disadvantage is that the company's future cash flow, earnings are measured, can be realized, affected by a variety of factors, with a lot of uncertainty.

If the valuation is very high, especially if the original shareholders have to retain part of their equity in the acquired company, investors will demand a bet.

As an investor, you can spend a lot of money to buy a company, but the acquired party has to promise to be able to achieve the performance to support the price, that is, the future cash flow and earnings.

If they can't, the original shareholders will have to compensate the investors with part of their equity, meaning the founders lose part of their stake or even get out of the game altogether if the bet fails.

There are four different stages of business development: start-up, growth, maturity and decline.

From practical experience, startups are the most difficult to value, with the growth period second and the maturity period the easiest.

For the startup phase of the enterprise, to give you an introduction to the valuation method used in the practice session:

1, 5 million yuan cap method

The method requires not to invest in a valuation of more than 5 million yuan of startups.

When the value of the enterprise at the time of exit is certain, the higher the pricing of the enterprise at the time of the initial investment, the lower the return of the angel investor, and when it is more than 5 million dollars, it will be difficult to obtain a substantial profit.

2, Box method

This method was pioneered by the American Box, the typical practice is to value the invested enterprise according to the following formula:

A good idea 1 million yuan,

A good profit model 1 million yuan,

Excellent management team 1 million - 2 million yuan,

Excellent board of directors $1 million,

great product prospects $1 million,

Added together, a startup is worth $1 million - $6 million.

The value of a startup is linked to a variety of intangibles that are clearly demonstrated by this valuation methodology, which is easy to follow and relatively reasonable.