116 
UDK: 334.758.2(035) 
Prevzemi pogosto ne ustvarijo vrednosti 
za prevzemne družbe. Eden izmed razlogov 
je, da prevzemne družbe preplačajo 
ciljne družbe – tarče. Pomembno je, da 
prevzemne družbe ne plačajo več od 
vrednosti tarč z vidika dejanske vrednosti 
in tudi ne prevzemne cene v absolutnem 
znesku. Razlika med notranjo vrednostjo 
in prevzemno ceno mora biti upravičena 
z realno oceno kontrolne vrednosti in sinergije. 
Kombinacija dveh načinov vrednotenja 
– metode diskontiranja prihodnjih 
denarnih donosov z uporabo pristopov 
stalne rasti in izhodnega multiplikatorja 
EBITDA ter metode na podlagi 
kazalcev z uporabo multiplikatorja 
EBITDA – je obravnavana z vidika 
delujočih podjetij. Kadar je prevzemna 
cena previsoka, naj prevzemne družbe 
raje opustijo prevzemne priložnosti. 
Ključne besede: vrednotenje prevzema, 
delujoče podjetje, vrednotenje na podlagi 
diskontiranega denarnega toka, vrednotenje 
na podlagi kazalcev, prevzemna 
vrednost 
Iz vleče k 
JEL: G 34 
dr. Andrej Bertoncel 
Carynthia Group Ltd., Trzin 
Institute for Business Growth and 
Creativity, Ljubljana 
Vrednotenje prevzema: kako vrednotiti delujoče podjetje? 
ACQUISITION VALUATION: HOW TO VALUE A 
GOING CONCERN? 
UDC: 334.758.2(035) 
Acquisitions too often do not create value 
for acquirers. One of the reasons is that 
acquiring companies often pay too much 
for targets. It is important not to pay more 
than the real worth that targets bring to 
acquiring companies. It is referred to as 
worth rather than acquisition price in 
absolute term, meaning that the difference 
between intrinsic value and acquisition 
price should be justified with realistic 
estimation of synergy and control. 
Combination of two valuation approaches, 
discounted cash flow method 
using perpetual growth and EBITDA exit 
multiple principles, and comparables 
method applying EBITDA multiple, is explored 
for valuing going concerns. When 
numbers do not add up, acquirers should 
pass up contemplated acquisitions. 
Key words: acquisition valuation, going 
concern, discounted cash flow valuation, 
relative valuation, acquisition value 
A b s t r a c t 
NG, ŠT. 5–6/2006 RAZPRAVE/DISCUSSIONS 
12 
1 Introduction 
The process of valuation is crucial and central to acquisitions. It is a common 
understanding that every asset, financial as well as real, has a value. In principle, 
any asset can be valued, but some assets are more difficult to value than others. 
For successful investing, the value and also sources of the value are important 
and need to be considered. 
Acquisition valuation as a formal process is still relatively young and new 
methods are constantly being developed in the world of business valuations. 
Professional valuation practitioners, who provide acquisition valuation services, 
use a wide array of valuation models. They range from simple to very sophisticated. 
Regardless of the valuation methods used, valuation practitioners all face 
uncertainty associated either with assets being valued or with valuation models 
themselves. To some people, like the famous Oscar Wilde, who described a cynic 
as a person that »knows the price of everything, but the value of nothing,« the 
value of an asset is not important as long as one can find a bigger »fool« to whom 
to sell that asset. In today’s world this may prove to be a big hazard and we would 
rather stay with a firmer foundation of rational investing. It teaches us not to pay 
more for an asset than it is worth, although a discussion on valuation can be made 
philosophical in nature by arguing the assumptions (Vaid, 2002). 
Objectives of valuation can be very different, but the primary objective of a 
monetary appraisal is determination of a numerical result either as a range or 
most probable point magnitude – i.e. the euro amount of a value (Fishman et al., 
2004). The numerical result has to be independent and unrelated to the desires of 
a company which calls upon the professional valuation practitioner to perform 
the valuation work (Fishman et al., 2004). Therefore, objectivity in valuation is 
strictly required from the appraisers. 
Acquisition valuations are complex, as they include a valuation of synergy 
and control. They go beyond just valuing an asset – i.e. a target company. The 
value of a target company at a given point in time can be defined as the expected 
payout value (Vaid, 2002). 
2 Acquisition Valuation Sequence 
Like any other analysis, acquisition analysis should follow a sequence of 
steps. A valuation should play a central role in the acquisition analysis. Bidding 
companies have to determine the fair market value for targets before making 
their bids, and the same has to be done by targets themselves before accepting or 
rejecting offers. Thus, valuation helps determine the exit value. 
Several steps are involved in an acquisition valuation: 

 Define acquisition rationale, 

 Select a target company, 

 Perform a comprehensive due diligence, 

 Define synergies and restructuring costs,
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BERTONCEL: ACQUISITION VALUATION: HOW TO VALUE A GOING CONCERN? 

 Define control premium, 

 Value a target, 

 Define a mode of payment – cash or stock. 
There are two main motives for takeovers: 

 Strategic motives, 

 Financial motives. 
In the literature, different theories for defining takeover 
motives are encountered. We refer to the following three 
theories: 

 Efficiency theory, 

 Incapable management theory, 

 Undervalued target theory. 
A common reason for acquisitions are undervalued 
targets, obviously by those who recognize that in time and 
often due to asymmetric information. Another rationale for 
acquisitions is incapable management of badly run target 
companies or self-interest and ego. Managers and their 
characteristics, in our view, represent the key success factor 
for companies, for good and for bad. On the other hand, 
getting a successful management team (»winners«) can be a 
good enough reason for buying a target company. 
The odds of achieving organizational success after 
takeovers are not good. That alone makes a strong case for 
comprehensive due diligence of targets as a very important 
component in the acquisition process. Professionally 
conducted due diligence is a source of information that will 
enable the valuation practitioner to make informed decisions 
about acquisition valuation throughout the process. 
The primary reasons for many takeovers are synergies, 
either financial or operating, which provide additional value 
from a combined company. According to the theory, a 
combined business should provide higher revenues and/or 
lower operational costs (»one plus one is more than two«). 
The value of a combined company should be greater than 
the value of previously independently operated companies. 
Thus, synergy has to be considered in quantitative terms 
and not in qualitative terms such as »strategic reasons.« The 
improvement increments, such as cost savings, higher 
growth, and debt capacity, should be determined in 
measurable units. Companies have to make changes that 
produce gains against other firms. The overstated synergies 
create over-optimistic expectations and over-estimation of 
the target value, which is called the »synergy trap« (Sirower, 
1997). This is even more so in hostile takeovers. 
3 Acquisition Valuation Premises and Concepts 
Acquisition valuation is the process of determining the 
value of a business enterprise or ownership interest therein. 
The methodology of acquisition valuation is based on 
three fundamental premises (Fishman et al., 2004): 

 Acquisition value is equal to the present worth of the 
future benefits of ownership, 

 Value is not always a single number, 

 Value is based on a specific point in time. 
A rational buyer will purchase an asset only if the actual 
value of future incomes expected from that asset, discounted 
to present value, is equal or higher than the purchase price. 
On the opposite side, a rational seller will not sell an asset if 
future incomes expected from that asset discounted to present 
value are greater than the offered price. 
There is no single, correct value. Forecasting future 
events is subjective in nature because of an embedded 
uncertainty and cannot be measured with safety. That is the 
reason why estimated values are expressed as either a single 
monetary amount (e.g. in euros) or a range (from – to). 
Estimations of value are based upon the information at hand 
on a certain day – the effective date of the appraisal. 
In takeover process, acquirers have to decide upon the 
following key questions: 

 What is the fair market value of a target? 

 What price to offer? 

 When to place the offer? 
Obviously, the offered price is a very important decision 
factor but not necessarily the only one for deal making or 
deal breaking. In any case, buyers should know what 
maximum price they are willing to pay for target companies. 
Value is an imprecise term because it varies with the 
situation (Fishman et al., 2004). Hereafter, we provide some 
basic definitions of value that are stated in acquisition 
valuations (Eccles et al., 1999): 

 Intrinsic value, 

 Market value, 

 Synergy value. 
Intrinsic value is the value based on comprehensive 
analysis and judgment of a target »as is,« independent of 
any control change, and is most often expressed as the present 
value of all expected future cash flows to be derived from 
the business, discounted to the present at an appropriate 
discount rate. The term refers to the »true« or »real« value 
of a target company.1 
Market value is the amount at which a target is valued 
by the market when not under pressure for change of control 
and there is reasonable knowledge of relevant facts about a 
target company. It is higher than the intrinsic value of a 
company because it includes »market premium« – 
anticipation of a possible takeover in the future. In case of a 
joint stock company, the market value of such a company is 
the current share price multiplied by outstanding shares. The 
term commonly used is market capitalization. 
Synergy value is a notion of investment value. It refers 
to the target’s value as a going concern and it takes into 
consideration all positive synergistic effects arising from a 
combined company. 
Acquisition price is the result of negotiations between a 
buyer and a seller and it is the price where the expectations 
1 For more, see ASA Business Valuation Standards, 2002, p. 25.
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NG, ŠT. 5–6/2006 RAZPRAVE/DISCUSSIONS 
of both parties meet. The acquisition price refers to a 
negotiated final price, which is rarely equal to either intrinsic 
value or market value, as it includes the so-called acquisition 
premium. 
For this reason, acquirers have to define how big a 
»reward«, i.e. acquisition premium, they are willing to pay 
to the owners of target companies, meaning they have to 
know the exact synergy value as well as what portion of the 
synergy value they are willing to share with shareholders of 
target companies. Hence, the acquisition price can be seen 
as an allocation of certain future benefits to owners of the 
target company. Obviously, the acquirers’ desire is to retain 
as much synergy value (future benefits) as possible for their 
shareholders. 
In practice, different valuation methods have evolved for 
estimating the targets’ value. They are based on three 
approaches to valuation. 
The three valuation concepts2 are (Fishman et al., 2004): 

 Income concept, 

 Market concept, 

 Cost concept. 
4 Discounted Cash Flow Valuation 
The income concept is a general way of determining a 
value indication of a going concern3 through which 
appraisers discount future cash flows (earnings) from 
forecasted operations to their present value, including a 
residual value of the target at the end of an explicit period 
(the last year of the forecasted period). 
We argue that the asset-based approach should not be 
considered in a going concern valuation and therefore no 
further reference to the cost concept is made. We argue 
further that the market approach can be a general way of 
determining a value indication of a going concern in 
acquisition valuation by comparing such a target to 
comparable companies. Multiples, such as the EBITDA 
multiple, can be usefully applied for gauging residual value 
in discounted cash flow valuation. 
While discounting is one of the three approaches to 
valuation, we argue that it is most frequently used in practice 
and is the foundation on which we build our acquisition 
valuation model. 
From the time perspective, discounted cash flow (DCF) 
valuation of going concerns separates free cash flow 
forecasting into two categories: initial period of explicit 
forecast, and residual value of a going concern at the end of 
that period. Going concerns would normally operate beyond 
the explicit period for which it is possible to make a discrete 
(reasonably accurate) cash flow forecast. The residual value 
of a business as of the end of a discrete projection period is 
critical to value and is established on the basis of perpetual 
growth assumptions of future cash flows. 
Source: Adapted after Eccles et al., 1999, p.52. 
Figure 1: Value sharing among shareholders of acquiring company and target 
2 The three approaches to value refer to early valuation theory 
based on asset valuation methodology. In business valuation 
theory, they are referred to as three concepts. 
Source: Adapted from Fishman et al., 2004 and Damodaran, 2002. 
Figure 2: Valuation concepts, approaches and methods 
3 Going concern is an ongoing operating business enterprise 
(ASA Business Valuation Standards, 2002, p.25).
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BERTONCEL: ACQUISITION VALUATION: HOW TO VALUE A GOING CONCERN? 
In acquisition valuation, a complete set of pro-forma 
financial statements (income statements, balance sheets, and 
cash-flow statements) needs to be developed. Together, they 
form a financial model for a company. 
Forecasting assumptions, usually for the time period of 
at least five years, are expressed as increases or decreases in 
the form of percentage points and are then translated by 
valuation (computer) models into absolute figures. 
The business plan of a target company, based on 
forecasting assumptions for the next five or more years, is 
translated into pro-forma statements. Pro-forma (forecast) 
financial statements provide the platform needed for free 
cash flow computation. An example how to create a financial 
model, although a simplified one, is shown as Table 1. 
Free cash flow can be defined as cash available for 
distribution to investors after all planned investments and 
taxes. Free cash flow is true operating cash flow of any 
company. The rationale of applying free cash flow goes like 
this: operating income (EBIT – earnings before interest and 
taxes) is the income earned by a company regardless of how 
it is financed. Operating income after taxes excludes any 
effect of debt financing. By adding depreciation, total aftertax 
cash flow from operations is obtained. After-tax cash 
flow could be distributed entirely in the form of dividends 
and interest payments, if so desired. In a conventional 
environment, however, investments in business are 
done.Investments, in their broad interpretation, are capital 
expenditures (capex) and working capital increases. 
In general, free cash flow is not affected by financial 
structure, although a company’s financial structure has an 
affect on the weighted average cost of capital and 
consequently the value of the company. 
The principle of the time value of money is applied, 
meaning that a euro today is worth more than a euro expected 
in the distant future. Finding present values of future amounts 
is called discounting. Discounting is the process of finding 
the present value of a future sum.4 In valuation theory, a 
discount rate refers to the expected rate of return that 
acquiring companies would demand on the value of 
ownership interest in target companies at a given risk. 
Usually, acquisition valuation methods use discount rates 
rather than capitalization rates,5 as it is expected that 
Table 1: Pro-forma financials of a hypothetical »TARGET« in a stand alone case 
4 The relation between present value (PV) and future value (FV) 
can be written as: 
FVn 
PV = ———— 
(1 + k)n 
where, (1 + k)n = Present value interest factor (PVIF). 
5 Discount rate and capitalization rate are not identical and 
interchangeable. They are related, but are not the same.
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NG, ŠT. 5–6/2006 RAZPRAVE/DISCUSSIONS 
combined future operations (of an acquiring company and a 
target) will be different from their current or past operations. 
The value of ownership interest in a company is equal to 
the present worth of future benefits of ownership (Fishman 
et al., 2004). While this is a generally accepted premise, it 
can be a very challenging approach to apply in practice 
because of high uncertainties in the estimation of future 
benefits. 
The standard valuation model used to calculate free cash 
flows is a quantitative DCF model, but the inputs are based 
on an appraiser’s subjective judgment and forecasts. Thus, 
calculated value is influenced by an appraiser’s biases. 
An example of how to calculate free cash flows based 
on pro-forma financials (see Table 1) is shown as Table 2. 
The discounted cash flow method evaluates a company 
on the basis of free future throw-offs expected to be generated 
by operations, thus taxes are computed on operating income. 
With the discounted cash flow method, we estimate the 
intrinsic value of a target company. 
The required rate of return on capital budgeting decisions, 
including acquisitions, is the weighted average of both cost 
components, capital and debt. It is called weighted average 
cost of capital (WACC).6 
The value of a target is calculated by discounting 
forecasted cash throw-offs at the weighted average cost of 
capital, i.e. cash flows after all operating expenses, capital 
expenditures and taxes, but before any pay-outs to debt or 
equity holders of a company. 
The value of a target company can be defined by applying 
the discounted cash flow (DCF) model of valuation. 
Formula 1: DCF model 
t = n CF t 
VT = . ————— 
t=1 (1 + WACC)t 
where, 
VT = Value of target company, 
CF t = Expected cash flow in period t, 
WACC = Weighted average cost of capital. 
An example of how to calculate the value of a target 
company in a stand alone (status quo) case based on free 
cash flows (see Table 2) is shown as Table 3. 
Enterprise value can be obtained by using either the 
perpetual growth principle or the earnings before interest, 
taxes, depreciation, and amortization (EBITDA) exit 
multiple. As there is no single correct value, the obtained 
company value should be presented in a range (from - to) by 
using both principles. 
As previously stated, valuations can be biased by 
subjective research and forecasts. Quantitative valuation 
models themselves do not solve the issue, as the inputs are 
subjective judgments. Hence, valuations age quickly. 
Constant flow of new relevant information about targets has 
to be taken into consideration and valuations need to be 
updated to address new situations. 
There is an uncertainty about the calculated final number 
and we have to give ourselves a reasonable margin for error 
Figure 3: Free cash flow chart 
Table 2: Computation of free cash flows (FCF) of a hypothetical »TARGET« 
6 WACC = (CAT x wd) + (Cps x wps ) + (Cs x ws) 
where, 
WACC = Weighted average cost of capital, 
CAT = After-tax cost of debt, 
wd = Weight for debt, 
Cps = Cost of preferred stock, 
wps = Weight for preferred stock, 
Cs = Cost of common stock, 
ws = Weight for common stock.
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BERTONCEL: ACQUISITION VALUATION: HOW TO VALUE A GOING CONCERN? 
in making recommendations on the basis of valuation 
(Damodaran, 2002). 
5 Control Valuation 
Acquiring companies normally pay acquisition 
premiums. In part, they reflect the »value of control« 
(Damodaran, 2005). The value of control is proportional to 
the value maximization capacity of the target. The rationale 
behind a value of control lies in expectations of an acquirer 
to be able to run a company more efficiently. Well-managed 
companies would get little or no control premium, as there 
is hardly any room for operational improvements. On the 
other hand, poorly managed companies would get a bigger 
premium, as there is much room for improvements. 
The value of controlling a company normally applies to 
publicly traded companies as a premium that acquirers would 
pay for voting shares (Damodaran, 2005). After takeover, 
existing practices would be changed and better management 
policies applied. 
The value of control is comprised of two components: 
change in value by implementing new management policies, 
and the probability that such change can actually occur in 
real life (Damodaran, 2005). 
In a hypothetical acquisition of a »Target« and 
consequent change of control, certain improvements are 
envisioned. New management policy takes place 
immediately after takeover. The investment rate remains 
unchanged (entire plow back). The increase in return on 
capital increases growth rate in the next five years. The 
operating margin goes up. The cost of capital decreases due 
to optimal capital structure. In other words, the target is better 
(optimally) managed after takeover and change of control. 
It is important to define all key value drivers, before and 
after acquisition, in control valuation. 
Based on the assumptions (value drivers), a financial 
model with three basic financial statements (income 
statement, balance sheet, and cash flow statement) is 
prepared, followed by free cash flow estimation and control 
valuation. Same valuation steps are performed as in standalone 
valuation (see Tables 1 to 3). After obtaining a value 
of a target after change of control, the value of control can 
be calculated as shown in Table 4. 
Table 3: DCF valuation of a hypothetical »TARGET« 
Figure 4: Components and value drivers of free cash flow 
The value of control can be defined as the value of a 
company after restructuring (»optimal« value) minus the 
value without restructuring (the »as is« value). The »as is« 
value is also called the stand alone or status quo value of a 
company managed by incumbent executives. »Optimal« 
value refers to new management and expected 
improvements. 
Table 4: Valuation of control for a hypothetical »TARGET« 
6 Synergy Valuation 
In acquisition valuation, positive effects on combined 
value have to be defined in addition to stand-alone valuations 
of both companies, an acquiring company and a target. The 
positive effects are called synergy. Synergy can be defined 
as increases in competitiveness and resulting cash flows 
beyond what the two companies are expected to accomplish 
independently. 
In other words, a target company owns certain assets 
that become even more valuable in combined operations. In 
general terms, we distinguish between two different forms 
of synergy: operating and financial synergies. Synergy as a 
valuation input can take different forms, such as increased 
future growth or reduced costs. 
Operating synergies have an impact on growth and 
margins, and ultimately returns. Financial synergies have
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NG, ŠT. 5–6/2006 RAZPRAVE/DISCUSSIONS 
an impact on higher cash flows and lower discount rates. It 
is important to estimate the value of different types of 
synergies by defining how much additional value is created 
in acquisition. 
However, only reasonable economic expectations should 
be built into future forecasts. Eventually, forecasted synergies 
have to materialize in performance gains by competing better 
in today’s very competitive environment. Therefore, a 
realistic (and not optimistic) approach is recommended as 
the synergies have to be clearly quantified in the valuation 
process. 
Acquiring companies usually pay hefty acquisition 
premiums. Acquisition premiums are publicly known and 
paid up front, contrary to later pay-offs from combined 
operations, which are not known and are uncertain. Normally, 
the bigger the projected synergy from combined operations, 
the higher the premium to owners of the target company. 
Paying unjustified premiums is one of the main reasons 
for the high failure rate of acquisitions. In any case, a paid 
premium should not exceed the projected synergy, as it would 
result in lost value for an acquirer. 
Acquiring companies should clearly distinguish between 
projected synergy and realized synergy. In acquisition 
valuation, business forecasts sometimes lose track of reality 
and are overly optimistic. Acquisition premium means 
nothing else but additionally spent money and can be justified 
only with realized added (i.e. additional) value from 
combined operations. 
The value of synergy is estimated by Damodaran (2005) 
as: 

 First, valuing both companies, the acquiring company 
and the target, independently; 

 Second, valuing the combined company with no synergy; 

 Third, valuing the combined company with synergy. 
In valuing an acquiring company, the same valuation steps 
as in the previously shown case of valuation of a hypothetical 
»TARGET« (see Tables 1 to 3) are used, based on historical 
data and forecasting assumptions for an acquiring company 
in stand alone status. A financial model with three basic 
financial statements (income statement, balance sheet, and cash 
flow statement) is prepared, followed by free cash flow 
estimation and stand-alone valuation of the acquiring company. 
The next step in the process of valuing synergy is 
valuation of a combined company, with no synergy built in. 
The value of a combined company is obtained by adding 
the values, obtained previously in the valuation process, for 
acquiring company and target. 
The combined company is thereafter re-valued for 
synergy. Value drivers, i.e. among others but not limited to 
growth rate, operating margin, cash tax rate, fixed assets 
and working capital requirements, are estimated according 
to performed due diligence and internal analysis. It is 
considered that all relevant information is available at the 
time of valuation (informed judgment). Forecasted 
synergistic effects are built into the financial model. Free 
cash flow estimation and valuation is performed. 
After obtaining the value of an acquiring company as a 
stand alone, the value of a target with change of control, and 
the value of a combined company with synergy, the value of 
synergy can be calculated as shown in Table 5. The value of 
synergy can be defined as the value of the combined company 
with synergy, less the sum of the value of the acquiring 
company and the value of the target company with change 
of control effects. 
Table 5: Valuation of synergy for a hypothetical »TARGET« 
Source: Damodaran, 2005, p.8. 
Figure 5: Valuing an acquisition
123 
BERTONCEL: ACQUISITION VALUATION: HOW TO VALUE A GOING CONCERN? 
The following figure summarizes acquisition valuation 
guidelines by their components for valuing going concerns 
based on the discounted cash flow approach: 
7 Relative Valuation 
The market approach is a general way of determining a 
value indication of a target company in acquisition valuation 
by comparing the target to »similar companies« that have 
been previously sold. Similar companies have to be 
reasonable comparisons and have comparable quantitative 
and qualitative parameters. 
The traditional definition defines a similar company as 
one in the same industry segment. Although it is impossible 
to find an identical company, basic characteristics have to 
match, especially expected growth and risk environment. 
Only arm’s-length transactions can be taken into 
consideration. Therefore, a careful selection of underlying 
data has to be made. Relative valuations should not be mixed 
up with the »rule of thumb« approach and should not serve 
as the only basis for final valuation judgments. A combination 
of both methods, relative valuation and discounted cash flow 
valuation, is the recommended approach. 
Multiples can also be applied for gauging residual value 
in discounted cash flow valuation. As shown in the valuation 
of a »Target« (see Table 3), the EBITDA exit multiple was 
applied to estimate its enterprise value. 
Valuations based upon multiples are only indicative and 
should only have a role of complementing the discounted 
cash flow valuation. The popularity of relative valuation 
comes from its simplicity and broad availability of data, at 
least for publicly traded companies. 
After finding comparable companies, their market values 
are obtained and translated into standardized values. 
Absolute figures cannot be compared; therefore, 
normalization of absolute figures (prices) into multiples is 
performed. The multiples are calculated as the ratio of value 
to some normalized metric such as net income, EBITDA or 
revenue. 
Multiples based on the last twelve months (LTM) 
earnings are called trailing multiples. Forward (or 
prospective) multiples use an estimate of earnings for the 
next twelve months and give better estimates of value 
because the expectations about the near future are already 
incorporated. 
In practice, valuation practitioners rely frequently on 
EDITDA (earnings before interest, taxes, depreciation, and 
amortization) or EBIT (earnings before interest and taxes) 
metrics. EBITDA multiples are often called »cash flow 
multiples.« 
The EBITDA multiple is calculated by dividing an 
enterprise value, which is the value of equity and net debt7 
of a comparable company, by its EBITDA. When a multiple 
is multiplied by a target’s EBITDA, the yield is an estimation 
of an enterprise value of a target. The evolution phase of the 
sector (comparable companies) at the end of the explicit 
period should be carefully considered. Only if growth is 
expected to continue, current multiples can be extrapolated 
into the future. 
8 Acquisition Value 
The objective of an acquisition valuation is to provide 
an indication of value. A professional valuation should 
establish the fair market value for a willing and informed 
buyer who would purchase a company in normal open market 
conditions. 
Valuation models are quantitative (mathematical) 
models, but future forecasts are subjective. More complexity 
does not bring more reliability. Valuation is not objective 
but is a subjective judgment of true value. Even in 
professional valuation there is always uncertainty about the 
final numbers. Hence, the estimated values should be 
presented by appraisers as a range. 
Table 6: Relative valuation of a hypothetical »TARGET« 
Table 7: Acquisition value of a hypothetical »TARGET« 
7 Net debt = Total debt – Cash & Equivalents. Negative debt 
indicates excess cash. 
9 Conclusion 
Despite decades of empirical evidence proving that too 
many acquisitions go wrong, managers continue to 
consummate takeover transactions. During the past few 
years, the number of acquisitions has significantly increased 
in total number and in value. Any acquisition is a very 
complex process, from pre-acquisition market research and 
potential targets’ screening, due diligence, negotiation, and 
closing, through to post-acquisition integration and value 
creation. 
The price of making a mistake can be greater than the 
price of missing an opportunity. One of the reasons why 
acquisitions fail to create value is high acquisition price. 
Herewith high acquisition price it is not referred to in 
absolute terms, i.e. in euros, but rather to what acquisitions 
are really worth to acquiring companies. 
So what is the right acquisition price? Valuing 
acquisitions correctly is very important knowing the fact 
that too many deals fail in the real world. Three concepts of 
value are presented in this paper: intrinsic, market, and 
synergy value. The intrinsic value is defined as the »true«
124 
value of a company, which is based on the net present value 
of forecasted cash flows independent of any acquisition. In 
today’s world, acquisitions are consummated on most 
occasions at prices higher than their intrinsic value. 
Acquisition valuations are complex and go beyond just 
defining the value of target companies. The acquisition 
valuation concept includes valuation of synergy and control. 
It is important to perform first the valuation of synergy and 
control, and second to decide how much of that value we 
are willing to share with shareholders of the target company. 
In other words, the value gap has to be defined. 
Discounted cash flow and relative valuations are 
presented as ways to define the acquisition value of a going 
concern. When applying the discounted cash flow valuation, 
it is recommended to use both principles for establishing a 
residual value- the perpetual growth principle and the exit 
multiple principle. A common approach used in practice to 
gauge residual value is to link discounted cash flow with 
certain valuation multiples. We argue that the forward 
EBITDA multiple is the right choice for estimating residual 
value in the valuation of a going concern. 
EBITDA multiples are referred to as »cash flow 
multiples« and, when applied to a targets’ EBITDA, they 
yield estimates of enterprise value. In relative valuation, we 
argue that the EBITDA multiple, as the one closest to »cash 
flow,« should be a preferred choice for establishing the 
enterprise value of going concerns. We argue that perception 
of value has to be supported by a sound investing principle, 
which implies that a purchase price (the price actually paid) 
should relate to the worth of a target, i.e. cash flows expected 
to be generated by the business. As logical as that seems to 
be, it is often forgotten in the world of acquisitions. 
In the real world, valuation is done in too many instances 
with an already set price in mind. The decision to acquire a 
target precedes acquisition valuation of that target. We argue 
that without precise quantification of control and synergy, 
we cannot determine the worth of a target and therefore tend 
to over-pay. 
Hence, a systematic approach to acquisition valuation 
by using all three described methods is highly recommended. 
The acquisition value of a target should be presented as a 
range. Strict appraisal guidelines in place at acquiring 
companies should help in consummating deals at the right 
price. Professional acquisition valuations can help acquiring 
companies to get the right value for their money. 
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