Don't sell your company before reading this article
We live in times of capital concentration and one of its consequences is the constant mergers and acquisitions that we see in the market. Those who have a well-established business feel the effects on their skin, and are constantly harassed by investment funds and large conglomerates of companies. But, before you consider any transaction involving your company, I would like you to read this article.
Image 1: Brazil breaks record for mergers and acquisitions in 2022. Source: Valor Econômico
Status quo
You are probably a hard-working entrepreneur, who understands every detail of the business, knows customers and their demands, is up to date with the sector's technology, and competes with the competition inch by inch in the market. It's exhausting work that you perform masterfully and your time is a scarce commodity. One fine day, without any warning, a delegation of suits knocks on your door wanting to buy your company , what starts with a simple chat, turns into a firm proposal to buy the company . Your partners are tempted by the business, and you no longer sleep at night looking for the answer to the question:
Should I sell my company?
Unfortunately, I cannot help you with the decision-making process of buying or selling your company , which is a very personal decision, by the way. However, what I can do is help you improve your company's sales price.
The cashier is king
In modern company valuation theory, we employ the concept of “a company is worth what it generates” . In this valuation methodology, the more cash and profit your company generates, the more valuable it becomes. Similarly, if your company generates neither cash nor profit , it has less value .
Assessment methodologies used by funds
The appraisers sitting in front of you will most likely use one of two valuation methods to arrive at a fair price for your business: a Discounted Cash Flow Valuation, or a Multiple Valuation. In both cases , cash generation is the primary metric for the evaluation model used, consequently our trick (knowledge) in finance will work like magic.
To demonstrate a practical case, in this article I will use the profit multiple valuation methodology, considering a multiple in the region of 10 (PE=10). The rationale for this multiple is that the buyer is paying R$10 for every R$1 of your company's profit , therefore, the buyer expects to have a return on his investment (Payback) in 10 years, if everything remains constant.
If you want to know more about multiples, I leave the link to Professor Aswath Damodarn 's database.
With this, we are able to answer one of the most searched questions on Google:
How to increase the price of your company?
We just need to increase profit. Consider this:
Image 2: Example of Income Statement. Source: Celesc
When we study the Companies' Income Statement (DRE) , we see that there is a line destined for non-operating revenues . It is in this line that sources of income that do not come from the company's main operation are computed. Using Celesc as an example, in this line we would have all revenue that does not come from the sale of electricity. This is exactly where our strategy comes in, creating a non-operating revenue line that will impact profits. 
Image 3: An Example of a Balance Sheet Source: Celesc
When companies are at a mature stage , it is common for there to be a considerable amount of cash , which is spent waiting for the company 's new projects. It is at these times that resources are allocated to investments that unfortunately do not take care to generate cash flow , and are therefore disregarded from the DRE , a document that company valuation models pay more attention to.
A case study
Let's imagine that your company is medium-sized and has a turnover of R$10 million per month with a net margin of 15%. We also assume that your company did not distribute the profit from the previous year , around R$18 million, keeping it in a traditional investment fund .
Table 1: Valuation arising from the use of Cash in the conventional way
As we can see, cash and cash equivalents grew as expected, but unfortunately this capital reserve was unable to impact the last line of the Income Statement : net profit. Consequently, company valuation models will have difficulty measuring the benefit of surplus cash and the fair value of the company generated by our model will be R$180 million.
Let's now analyze the same company with a single change: using cash in applications that generate contributions .
Table 2: Valuation Generated by the new added cash flow.
It's all part of the distinction between capital gain and income . If we focus on creating a cash flow , say every six months, we will be able to make its effects reach the last line of the Income Statement , causing profit to be increased. This occurs because accepted accounting standards only consider revenue if there is actually a receipt of amounts . As net profit is more easily understood by company valuation models , we have an increased company value of R$195.3 million.
Table 3: Comparison between the traditional model and the proposed model.
Normally, in private negotiations, surplus cash and all other non-operating assets remain with the former owners, but there is no fixed rule. As we can see, if we focus on creating non-operating revenue we can obtain another R$13.7 million from this possible business.
It is worth remembering that it would take around a year for these changes to be recognized in accounting and reflected in the valuation . In the meantime, all you can do is “cook” the business, until all the adjustments are implemented, and hope that buyers haven’t read this post.
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