"How much is my company worth?" is probably the hardest question a business owner can ask about their own business. Business valuation exists to answer with method what would otherwise be mere opinion: a structured process that estimates the economic value of a company from its results, its assets and its future prospects.
In Portuguese practice, the valuation almost always arrives late: when an unexpected purchase offer lands on the table, when a shareholder wants out, or when succession becomes urgent. Negotiating in those circumstances, without a well-founded benchmark of value, puts the owner at a disadvantage against buyers and investors who carry out this exercise every day.
In this article we explain the three most widely used methods, the moments when a valuation makes sense, and the factors that, in practice, pull the final figure closer to — or further from — what the balance sheet suggests.
Why Book Value Is Not Market Value
The balance sheet records the past: assets at historical cost, net of depreciation, and equity built up over decades of accounting decisions. The market, by contrast, pays for the future. A loyal client base, a brand with real standing in its region, multi-year contracts or a technical team that would be hard to replicate rarely appear on the balance sheet — and these are precisely the elements a buyer values.
That is why two companies with identical equity can command very different market values. Book value is a useful starting point; treating it as the reference price in a negotiation is a mistake that tends to prove expensive.
The Three Classic Business Valuation Methods
1. Discounted Cash Flow (DCF)
The DCF (discounted cash flow) method estimates a company's value from the cash flows it is expected to generate, discounted to the present at a rate that reflects the risk of the business. It is the most rigorous method conceptually and the one preferred in transactions of any meaningful size, because it forces credible financial projections and a discussion of concrete assumptions: sales growth, margins, capital expenditure and working capital requirements.
Its weakness is the flip side of its strength: the result depends on the projections. An optimistic business plan produces inflated valuations; a prudent, well-supported plan produces a value that can be defended before any counterparty.
2. Market Multiples
The multiples method compares the company with transactions involving similar businesses, or with listed companies in the same sector, applying ratios such as multiples of EBITDA or of sales. It is quick, intuitive and reflects what the market is actually paying, which is why it dominates negotiation conversations among SMEs.
It does, however, demand judgement: multiples vary with sector, size, growth and market conditions. Applying a listed multinational's multiple to a regional SME, without the appropriate adjustments, leads to unrealistic expectations.
3. The Asset-Based Approach
The asset-based approach starts from the balance sheet and restates assets and liabilities at fair value: property revalued at market prices, equipment at replacement or realisable value, receivables adjusted for collection risk, contingent liabilities properly recognised. It suits companies with a strong property component, or liquidation scenarios, but it undervalues businesses whose worth lies in the activity rather than the assets.
Above all, a company is worth the wealth it can generate in the future. The balance sheet tells the story; the cash flows justify the price.
In professional practice, the three methods are used together: DCF as the central reference, multiples as a sanity check and the asset-based approach as a floor. When they converge, the owner can take comfort; when they diverge, the reasons must be understood before anyone sits down at the negotiating table.
When You Should Value Your Company
Valuation is not just for selling. There are several moments in a company's life when a well-founded benchmark of value makes a real difference:
- Full or partial sale of the business, or an investor taking a stake in the capital;
- Business succession, including the transfer of quotas (the shareholdings in a Portuguese private limited company) or shares to the children, and the organisation of a balanced division of the estate among heirs;
- Shareholders joining or leaving, where the value of the shareholdings determines the price of the transaction;
- Corporate reorganisations, such as mergers, demergers or the creation of a family holding company;
- Disputes between shareholders, or proceedings in which the company's value is a matter of evidence;
- Negotiating significant financing, where the robustness of the value presented strengthens the company's position.
In a succession context, valuation plays an additional role: it makes it possible to treat fairly both the heirs who stay in the business and those who follow other paths, reducing the risk of family conflict. In these cases, the tax implications of the transfer depend on the structure chosen and the family's specific circumstances, so they should be analysed case by case with specialist support.
The Factors That Push Value Up or Down
Two businesses in the same sector with the same turnover can be valued very differently. Revenue recurrence is perhaps the most decisive factor: multi-year contracts and loyal clients are worth more than one-off sales. Next comes dependence on the founder — the issue that penalises Portuguese SMEs most heavily: when clients, banks and the team all depend on a single person, the buyer discounts that risk from the price. Client concentration, the quality and reliability of financial information and the state of the corporate housekeeping also weigh in, because up-to-date articles of association, clear shareholders' agreements and an absence of litigation make any transaction easier.
The good news is that many of these factors can be worked on. A company that prepares its valuation two or three years in advance — professionalising its management and putting its corporate and accounting affairs in order — arrives at the negotiation in a substantially stronger position.
Preparing the Next Step
Knowing what the company is worth is the starting point for any structural decision: selling, bringing in an investor or passing the business to the next generation. At Ravina Promissora, we support business owners in the Leiria region and across the country in valuing their businesses and preparing the transactions that follow, with a team that combines financial, legal and tax expertise.
If you are considering handing the business on, explore our work in business succession; if you want a well-founded benchmark of value for your company, get in touch and book a diagnostic meeting.