Every year Deminor advises family businesses on the transfer to the next generation. The transfer of a family business involves several challenges, one of which is to reach an agreement on the valuation of the family business.
The valuation of the family business
Deminor advises that the valuation of the family business should initially be handled as if it were a sale to an external investor. In other words, the market value of the company must first be calculated.
The market value can be calculated by applying a valuation method or a combination of different valuation methods. The choice of a particular valuation method varies according to the activities and assets of the business. It is important to distinguish between companies whose value mainly depends mainly on the value of the assets (e.g. a real estate or holding company) and companies whose value depends on the performance of the activities (e.g. a service company like Deminor).
In the first case (asset value), the value of the company’s assets must be calculated. Deminor usually uses the Adjusted Net Asset Value method. This method is based on the book value of the company’s equity, corrected by the under- and/or overvaluation of the assets and liabilities (the market value of all assets and liabilities). In the case of a real estate company, for example, it is normal for a building to have a book value well below its market value, due to the depreciation and/or book appreciation of the building.
In the second case (business value), the value is calculated by a revenue-based approach. The best known (and applied) valuation methods are the Peer Group Multiple method and the Discounted Cash Flow method:
- The multiple method calculates the value of the company by multiplying a key figure (EBITDA, turnover) by a certain multiple (calculated from the value of similar companies).
- The Discounted Cash Flow method calculates the value of the company on the basis of expected future free cash flows (operating cash flows). For this, the company must have a business plan for the next three to five financial years.
Once the (objective) valuation of the family business has been calculated and discussed with the transferor, the successor and any other family members involved, the final takeover price and other modalities are set.
In the context of a family transfer, Deminor notes that the transferor usually applies a certain discount to the calculated enterprise value. This discount can take into account various factors :
- the family aspect (the fact that the company remains in the hands of the family)
- the successor has been working in the company for a long time (and has created a significant added value in this way)
- the transferor wants to limit the financial risk
At the same time, the transferor wants to organise the transfer as well and correctly as possible, taking into account the interests of all the children. In practice, therefore, it is important to discuss the valuation (by means of valuation methods), the discount and the subsequent arrangements with the parties involved.
In addition to the takeover price, various issues need to be discussed, in particular the duration of further cooperation/guidance by the transferor(s), the payment of the takeover price (possibly via a deferred payment/seller loan), the (possible) further cooperation with other family members who are active in the business, etc.
A tailor made approach
In a family business, the different interests at stake are not always easy to reconcile. Deminor helps to facilitate a family transfer by streamlining the interests in the family business through the drafting of agreements and by recording them in a family charter. A professional valuation of the family business is also an important element in the context of a family transfer.
Deminor’s structured and tailor-made approach guarantees highly professional support in the realisation of a valuation that also takes the family aspect into account. In this way the foundations are laid for a smooth family succession.
Are you looking for advice on the valuation of your family business or in the context of a family transfer? Do not hesitate to contact Louis Lannoy for more information.