Business Acquisitions: Valuation

Business Acquisitions: Valuation

Valuation is a critical step in any acquisition. Buyers typically communicate their assessment of value in the form of an indicative bid, based on both information gathered during the process and their own knowledge of the market and industry.

During due diligence, these assumptions are tested and verified to ensure the valuation reflects the true position of the target company.

In this article, we outline the most common valuation methods and take a closer look at DCF valuation (Discounted Cash Flow).

Common valuation methods

DCF valuation
DCF is based on forecasting future free cash flows and discounting them to present value using an appropriate discount rate. This approach focuses on the company’s earning capacity and is particularly useful for businesses with stable, predictable cash flows.

Multiple valuation
This method uses valuation multiples from comparable companies or transactions, such as EV/EBITDA, EV/Sales, or P/E ratios. It is relatively quick and simple but requires careful benchmarking against truly comparable companies to be reliable.

Asset-based valuation
Also called substance valuation, this method assesses the company’s net asset value by valuing assets and liabilities. It is often applied to businesses with significant tangible assets such as property, plants, or machinery.

A closer look at DCF valuation

DCF valuation estimates the present value of a company by discounting expected future free cash flows.

Key elements of DCF:

• Future cash flows – Revenues minus expenses, taxes, investments, and changes in working capital, typically forecasted over 5–10 years.
• Terminal value – The value of cash flows beyond the forecast period, often based on a perpetual growth rate (commonly around 2%, in line with long-term inflation).
• Discount rate (WACC) – Reflects the risk level of the company. The Weighted Average Cost of Capital combines the cost of equity (often calculated using CAPM) and the after-tax cost of debt, weighted by the company’s capital structure. Risk premiums may be added for company-specific, industry, or market risks. Higher risk = higher discount rate.

The process:

1. Collect historical financial data and forecasts (revenues, costs, investments, working capital, taxes).
2. Forecast free cash flows based on realistic assumptions and market analysis.
3. Estimate terminal value using an appropriate perpetual growth rate.
4. Calculate the discount rate (WACC).
5. Discount both the forecasted cash flows and the terminal value to present value.
6. Add them together to determine enterprise value (EV).
7. Adjust for cash, debt, and other non-operating items to arrive at equity value.

Example:

• Enterprise Value (EV): SEK 100m
  
  • Cash: SEK 10m
  • Interest-bearing debt: SEK 20m
  • Other non-operating assets: SEK 5m
  • Other non-operating liabilities: SEK 10m
• Equity Value: SEK 85m

Synergies and integration costs

Valuation should also consider potential synergies and integration costs. Synergies can create cost savings or revenue growth, while integration costs (system alignment, restructuring, etc.) reduce value. Whether synergies are reflected in the purchase price is ultimately a negotiation between buyer and seller.

Conclusion

DCF provides a forward-looking perspective by focusing on the company’s ability to generate free cash flow. Combined with multiples and asset-based methods, it forms the foundation of most acquisition valuations.

At FLB Partners, we support clients throughout the M&A process — from valuation and strategy to negotiation and integration. Contact us today to learn how we can help your company achieve a successful acquisition.