In a period of strong market consolidation, many entrepreneurs turn to BuildUpValue to determine the value of their business. Correctly assessing a company’s value is a process that requires in-depth knowledge of market dynamics and a clear understanding of the factors that most influence this valuation.
It is undeniable that for entrepreneurs who have built their business, there is an emotional value associated with the journey, the challenges overcome, and the achievements reached. However, from the market’s perspective, the price is not determined by these emotional elements but by a set of indicators that determine the company’s potential to create value and generate future cash flows.
This reasoning becomes easier to understand when we put ourselves in the position of a potential buyer, as the logic applied would likely be similar. While there are different methods to calculate a company’s value — which vary depending on several factors, such as the maturity of the business — there are common elements that must be considered. The final value will always be a combination of the factors we mention below.
In this article, we focus on the technology sector, given the increasing demand from entrepreneurs who are considering selling their businesses and others who consult us with interest in acquiring companies. Despite being a highly dynamic sector, both sellers and buyers avoid publicizing their intentions, aware that doing so could influence the transaction’s value. For this reason, at BuildUpValue, our work is always conducted with maximum discretion and confidentiality, protecting the interests of both parties.
In our experience, the primary motivation behind these market movements is the absence of a middle ground for companies currently in operation: they either aim to grow, whether organically or through acquisitions, consolidating their position, or they risk gradually losing value, rendering all the work developed over the years irrelevant. This situation is exacerbated by the need for strong market positioning, both with customers and partners, the hiring of qualified human resources, significant investments in innovation and product development, and access to financing to support continuous growth.
These challenges become particularly relevant for companies that face difficulties in business succession. Competitiveness requires dedication, and often leaders, at certain stages of their lives, are unwilling to make that commitment. This is where BuildUpValue plays a crucial role, establishing a close relationship with entrepreneurs to understand their personal and professional circumstances and, together, outline the best exit strategy.
In most cases, these are already established companies with mature business models, and their valuation depends on their current assets and their potential to generate future revenues. To calculate this value, we use two main approaches that we consider suitable for this type of business: the Discounted Cash Flow (DCF) method and the Price/Earnings Multiplemethod. In the first approach, we credibly project future cash flows and discount those values to the present; in the second, we apply a multiple to a financial indicator of the company, typically net profit.
To apply this latter approach, the sector needs to have a certain level of maturity, with similar transactions or financial data from publicly listed companies. In our work, whenever possible, we use both methodologies to establish a probable valuation range.
In the technology sector, in particular, the importance of recurring revenue has grown significantly in these processes. The consistency of cash flows is crucial for the credibility of the valuation and the sustainability of the business, making this one of the aspects we work on most. This consistency is also the foundation for transitioning to software subscription models, which many companies in the sector have yet to implement but which have a direct impact on the valuation of their business.
Additionally, here are other important elements that should be considered in a company’s valuation: the size of the customer base and its potential for cross/up-selling, the existence of reference projects, the strengthening of the dominant market position and the consequent ability to influence prices, the product and technology roadmap, the team’s skills and experience, the availability of other companies for acquisition, among others.
The final result of a sale or acquisition process will depend on the ability to effectively demonstrate the strength of the arguments that support each of these factors, which together determine the final value of the business. For more information, feel free to contact our team.