Number crunching in M&As

When it comes to mergers and acquisitions, the key factor of the whole deal is, “valuation.” Whatever is the form of consideration (cash or stock), you need to determine the value of the business. Now the question arises, how do you do this? – And the answer obviously is number crunching.

There are few key numbers that the valuers look for ascertaining the value of a business:

1. Revenue – What comes into the business is what gets the rest of the business going. So, the most important number is “Revenue”. 

2. Profits – What is retained after spending the revenue to run the business is what the shareholders get. So the next key number is your Earnings before Interest, Tax, Depreciation and Amortization (EBITDA). 

3. Working Capital – It is the cash surplus you have when you get paid and you pay off your vendors and tax. A strong working capital is the evidence of healthy business. 

4. Assets & Liabilities – What you own and what you owe also is important. You should have surplus here also. Owning little is accepted, but owing more than what you own is not. 

5. Tax rate – Even though the tax rate is something that is not in your control, the amount of tax you owe on your income forms a major factor in determining the value of your business, because that is what determines what you get to spend. 

6. Debt & Equity – How you fund business is also something that valuers look forward to. Your return on equity is calculated considering the debt equity ratio as well interest rate on the debt. 

The desired return on investment of the buyer is compared to the return on equity of the business and hence the decision is made whether to acquire the business or not.