Why value a company?
Valuing a company means establishing a defensible value range at a given date. This exercise becomes essential as soon as a decision commits capital: selling your business, welcoming an investor, bringing in a partner or settling a dispute. Without a rigorous valuation, a negotiation rests on intuition rather than on method.
Four contexts call for a serious valuation, and each one shifts the cursor. In a sale, the seller seeks the highest defensible price while the acquirer hunts down every fragile assumption: the value retained arbitrates this tension. In a fundraising round, the issue is not only the amount raised but the dilution accepted; valuing a scale-up at EUR 8M rather than EUR 6M mechanically changes the percentage given up for EUR 2M of fresh money.
Bringing in a partner follows the same logic but with a continuity constraint: the value serves as the basis for a shareholders' agreement that will govern future exits, so it must hold over time. Litigation, on the other hand, changes everything: a separation, a succession or a conflict between shareholders places the valuation under the scrutiny of a judicial expert or a court. The method must then be traceable, documented and reproducible, because it will be contested step by step.
- Sale or transmission: arbitrating the tension between the seller's price and the acquirer's prudence.
- Fundraising: the valuation determines the dilution, not only the amount raised.
- Bringing in a partner: anchoring a stable value base for the shareholders' agreement.
- Litigation or succession: producing a traceable value, enforceable before a third party.
- Context precedes method: the same company is not valued the same way depending on what is at stake.
DCF: the discounted cash flow method
The DCF (discounted cash flows) values a company through its capacity to generate future cash. You project the free cash flows over five to ten years, bring them back to today's value at the opportunity cost of capital, estimated in practice by the WACC (weighted average cost of capital), then add a terminal value that captures the life of the company beyond the explicit horizon.
The projection starts from free cash flow: operating profit after tax, increased by depreciation, reduced by investments and by the change in working capital requirement. This flow is what actually remains available, not the accounting profit. The WACC is calculated as WACC = (FP/V)·rFP + (D/V)·rD·(1−TC), where FP denotes equity, D the debt, V their sum, and TC the tax rate that makes the debt partially deductible. The cost of equity rFP is obtained through the CAPM: risk-free rate plus beta multiplied by the market risk premium.
The terminal value often weighs 60 to 75% of the total value, which makes it the most sensitive point. The Gordon formula is written terminal value = FCF·(1+g)/(WACC−g), where g is a prudent perpetual growth rate (generally 1.5 to 2.5%, never higher than long-term economic growth). A sensitivity analysis is non-negotiable: varying the WACC by plus or minus 1 point and g by plus or minus 0.5 point produces a range, and it is this range, not a single figure, that constitutes the true result of a DCF.
Multiples: market benchmarks and consistency check
Multiples are not a valuation method in their own right: two companies showing the same EBITDA can be worth twice as much one as the other depending on their growth, the quality of their management and their risk profile. They serve as a market benchmark and a consistency check: an EV/EBITDA of 7 observed on comparable companies lets you test the plausibility of a value derived from discounted cash flows, not replace it.
The choice of the control multiple depends on maturity. EV/EBITDA dominates for profitable, mature companies because it neutralises depreciation and financing policies. The revenue multiple serves as a benchmark when earnings are still weak or volatile, typically for a scale-up reinvesting its entire margin. The set of comparables must remain credible: companies from the same sector, of comparable size, operating on similar markets. A multiple borrowed from listed giants almost always overvalues a Belgian or Luxembourg SME.
Normative adjustments separate a serious valuation from a mechanical calculation. The EBITDA must be restated for non-recurring items (an exceptional litigation, a capital gain on disposal) and for off-market executive compensation, frequent in owner-managed structures where the manager pays themselves little or a lot for tax reasons.
- EV/EBITDA: the reference for mature and profitable companies.
- Revenue multiple: useful when the result is weak, negative or too volatile.
- Comparables: same sector, similar size, similar market; avoid listed giants.
- Normative restatements: neutralize non-recurring items and off-market executive compensation.
Which method in which context?
The value of a company rests on its discounted future cash flows: that is the reference method. The context (size, sector, maturity, stakes of the transaction) determines how to implement it and which market benchmarks control it. When the DCF and the multiple benchmarks converge, the value is robust; when they diverge sharply, the gap reveals an assumption to question.
Maturity guides the choice first. A profitable, predictable company lends itself to the DCF, which values its cash trajectory. A loss-making but fast-growing scale-up is also valued through its future cash flows: contrasted scenarios, wide ranges, explicit assumptions. Revenue multiples observed on comparable transactions or funding rounds then serve as a market benchmark to frame those scenarios, not as a valuation method.
Sector and context then refine the picture. A highly profitable, asset-light services business is valued through its cash flows, controlled by multiple benchmarks. Finally, the transaction context shifts the outcome: a sale relies on the prices actually paid in comparable transactions as a negotiation reference, with the intrinsic value still established by the cash flows, while litigation requires a traceable, conservative method that can stand before a court.
- Profitable and predictable SME: DCF as the central method, multiples as a control.
- Fast-growing scale-up: cash flows projected by scenarios with wide ranges; revenue multiples as a market benchmark, never as a method.
- Profitable, asset-light services: discounted cash flows controlled by market benchmarks.
- Sale: prices from comparable transactions as a negotiation reference; litigation: traceable, conservative method.
10 classic valuation mistakes
Most flawed valuations are not due to a wrong formula but to poorly calibrated assumptions. A WACC that is too low, an unrealistic perpetual growth or synergies counted twice are enough to distort the result by 30% or more. Knowing these pitfalls allows you to challenge any valuation, including the one presented to you.
- Poorly calibrated WACC: a cost of capital underestimated by one point can inflate the value by 15 to 20%; the beta and the risk premium must reflect an SME, not a large listed company.
- Optimistic projection: extending double-digit growth over ten years without inflection; economic reality imposes a convergence towards market growth.
- Excessive perpetual growth rate: a g higher than 2.5% makes the terminal value explode and assumes, to infinity, growth faster than the economy.
- Double-counting of synergies: building into the price gains that only the acquirer can achieve amounts to making them pay for their own added value.
- Confusing enterprise value and equity value: forgetting to subtract the net debt from the EV mechanically overvalues the share price.
- Non-comparable multiples: applying a listed-company multiple as is to an unlisted SME, two realities that do not compare.
- Working capital neglected: ignoring the working capital requirement in the free cash flow overestimates the cash actually available.
- Non-normalized EBITDA: keeping non-recurring items or off-market executive compensation.
- Unchecked value: confronting the value derived from cash flows with no market benchmark and no sensitivity analysis.
- Single value announced: presenting a figure instead of a range, when every valuation is a confidence interval.
Practical case: valuing a Belgian SME
Let us take a fictional, purely illustrative SME: a B2B services company based in Brussels, generating 5M euros in revenue, growing steadily at 5% per year. The figures below are simplified assumptions meant to illustrate the method, not a real case. The goal: reaching a value range through discounted cash flows, controlled by market benchmarks.
The starting assumptions: EBITDA of EUR 0.8M (margin of 16%), annual investments of EUR 0.1M, change in working capital requirement of EUR 0.05M, and a corporate tax of 25%. The initial normative free cash flow comes out around EUR 0.5M. On the cost of capital side, we retain a WACC of 12%, consistent for a services SME of this size (moderate risk-free rate, sector beta, risk premium, plus a small-size premium). The perpetual growth rate g is prudently set at 1.5%.
With the DCF, you project the free cash flow over five years with 5% growth, then apply the Gordon terminal value: 0.64·(1.015)/(0.12−0.015), roughly 6.2M euros to be discounted. After discounting all flows and the terminal value, the enterprise value settles around 5.6M euros. This value represents an implicit multiple of about 7.0 times EBITDA, at the top of the range of 6 to 7 observed for mature services: the market benchmark supports the result.
In a real case, the range comes from the DCF sensitivity analysis (WACC plus or minus 1 point, g plus or minus 0.5 point), which this illustrative case does not run. We retain here a prudent range of 4.8 to 5.6M euros of enterprise value: the DCF value of 5.6M euros sits within it, and the market benchmarks (6 to 7 times EBITDA) bound it. Deducting a hypothetical net debt of 0.5M euros, the equity value lands between 4.3 and 5.1M euros. This consistency validates the robustness: had the DCF produced 8M euros where market benchmarks pointed to 4M euros, the growth or WACC assumptions would have had to be reopened before putting any figure on the negotiation table.
- Assumptions: revenue EUR 5M, EBITDA EUR 0.8M, growth 5%, WACC 12%, g 1.5%.
- DCF: enterprise value of about EUR 5.6M.
- Consistency check: implicit multiple of about 7.0 times EBITDA, within the 6 to 7 range observed on the market.
- Retained range: enterprise value of 4.8 to 5.6M euros (DCF value included, market benchmarks as bounds; full sensitivity to be run in a real case).
- Final equity range (net debt of EUR 0.5M deducted): EUR 4.3M to 5.1M.