When planning an M&A deal, valuation aspects clearly matter. Just how much is the candidate (target) company worth? Reams have been written on the subject. The seller wants the highest price as soon as possible, the buyer wants a risk-free bargain or at least not to overpay. The problem is there is usually a host of factors to take into account. And future hoped-for profits may or may not materialize because the future is extremely hard to predict. So what can a willing buyer and a willing seller agree?

There are many valuation techniques and valuation theory is evolving. Once upon a time, a publicly traded company might aim for a price/earnings (P/E) ratio of around 15, meaning it may take around 15 years’ after-tax earnings to pay back the share price. But for private companies, due to greater perceived risk a P/E ratio of only 5 years’ earnings may seem typical.

So what can we understand if an AI chip company like Nividia has a P/E ratio of around 100 years’ earnings? You might answer it isn’t for sale and we may not live 100 years. Others may answer that demand is increasing rapidly for the company’s product, and a P/E of around 100 is based on latest reported earnings not future expected earnings. But as mentioned, the future 100 years ahead is hard to predict.  And should contingent consideration or milestones be used in case any surprises emerge?

So for companies that are for sale, typical valuation techniques may include:

• Past Earnings based – typically EBITDA Earnings before interest, tax, depreciation and amortization – to arrive at a figure closer to cash generation potential of the business.
• Future earnings based
• Cash flow based
• Asset based e.g. the value of underlying real estate
• Trophy asset – the buyer acquires prestige
• Auction techniques as employed by auctioneers to encourage higher bids
• Etc.

All valuation techniques have their pros and cons. Here’s a few aspects not always noted:

• Poor management, improvement possible
• Over-borrowing, risk of collapse
• New trends
• Alternative market surveys of demand.
• Brand and quality factors.

Next Steps:

• Start planning the ingredients of your proposed acquisition or sale based on the above.
• Many of the surprises may be predictable with proper preparation.
• Valuation is more of an art than a science. What can be objectively justified?
• How are competitors typically valued?
• If there are no competitors, what matters in this case – profitability, cash flow, assets, technology, or something else?
• What is the other side really after? Can you read between the lines?
• Consult legal and professional advisors in each country concerned in specific cases.
• Contact us if you are looking for an M&A candidate to buy or sell.
• Contact us if you have your candidate and want to prepare for an M&A deal.

© Leon Harris 19.5.25, all rights reserved.  Email: [email protected],  Cell: +972-54-6449398.