Are you wondering how to evaluate a company for acquisition? With tens of thousands of mergers and acquisitions (M&A) taking place in the United States each year, you’re certainly not alone. When the economy is strong, the combined value of these M&A deals can reach well over one trillion U.S. dollars annually.
However, there are several risks associated with pursuing an acquisition opportunity. And if you don’t know how to determine the value of a company for acquisition accurately, you may wind up on the wrong side of the deal. In addition, having unrealistic expectations or being lax in the due diligence process can be financially fatal.
As competition for deals increases, it places more pressure on accurate valuation techniques, robust pre-closing underwriting, due diligence, and post-closing portfolio company management and oversight.
In this article, we’ll explain how to determine the value of a company for acquisition by listing four valuation methods and present an AI-powered solution that will help you find the best acquisition opportunities faster.
Questions to Ask When Evaluating a Business to Buy
Since many entrepreneurs have an overly optimistic idea of what their business is worth, it’s important to take a step back and objectively answer questions like these:
- Is this a scalable business?
- What are the economics of scaling the business: incremental margins and capex needed to grow?
- What is the company’s durable competitive advantage, and how can you strengthen it?
- How is the company positioned compared to incumbent competitors?
- What are all of the associated risks?
- Are you comfortable with these risk factors?
- What’s the likelihood of a profitable exit in the future?
Until you have collected essential information about the business, such as answers to the questions above, it’s impossible to evaluate company value with any real certainty. After evaluating a business to buy, you can begin a valuation of a company for acquisition.
How to Determine the Value of a Company for Acquisition
This section presents some of the most popular valuation methods when financially assessing an acquisition opportunity.
- Comparable Company Analysis. The “comps” valuation method compares the current value of a business to similar businesses by looking at trading multiples like P/E and EBITDA.
- Discounted Cash Flow (DCF). The DCF method attempts to value an investment today based on projections of future cash flows.
- Precedent Transactions. Precedent transactions analysis compares an acquisition opportunity to other companies that have recently been sold or acquired in the same industry.
- Leveraged Buyout (LBO). An LBO transaction is an acquisition funded using a significant amount of debt where assets from both parties are used as collateral.
Once you’ve determined the company’s value using an appropriate valuation method, it’s time to review your findings and decide if it’s time to make an offer. But how do you source acquisition opportunities in the first place?
Find the Best Acquisition Opportunity Using udu
We have a more efficient solution if you manually search for an acquisition opportunity.
Udu’s AI-powered technology suite allows PE managers to gain a competitive edge in the search for new platform companies, add-on acquisitions, and post-closing portfolio company management. By using udu’s AI and machine learning capabilities, fund managers can:
- Search for acquisition candidates that meet multiple prerequisites
- Avoid competitive deal candidates that are frequently proprietary
- Find deals faster due to udu’s real-time, non-database-oriented technology
- Perform key underwriting and due diligence functions
- Grow portfolio companies faster and more efficiently
Udu’s robust value-creating benefits enable PE fund managers to avoid or reduce their dependence on the widely-shopped auction process and associated valuation methodology to gain a competitive edge in the marketplace.
Instead of making assumptions when evaluating a business to buy, rely on advanced, AI-powered tools to guide you. Ready to see how udu can help your firm bridge the technology gap to find better, more qualified acquisition opportunities? Schedule a demo to learn how AI-powered deal sourcing can improve your PE firm’s investment decisions.