Business valuation
Business valuation is the process of determining the economic value of a business. In a transaction context — sale, partner entry, financing — that value is not a single number: it is a range that depends on who is asking, for what purpose, and what evidence supports the earnings. Valuation requires defining the method, the earnings base (e.g. normalized EBITDA), and the use to which the number will be put; the same business can have three different figures depending on whether the buyer is a financial investor, a strategic, or a creditor.
Why is a business valued?
In Mexico the most common reasons to value a business are:
- Full or partial sale of the company
- Entry of a partner or investor
- Resolution of disputes between partners
- Collateral for financing
- Estate or succession planning
The M&A sale context is the most demanding: it requires a defensible, documented valuation that survives the buyer’s scrutiny and due diligence, not an indicative number. A figure that cannot be supported by evidence collapses in negotiation — and can cost the deal.
What are the three main valuation methods?
The three methods and their use in Mexican SME M&A:
| Method | Approach | When it applies | Role in Mexican SME M&A |
|---|---|---|---|
| EBITDA multiple | Market (comparable transactions) | SME transactions with defensible normalized EBITDA | Primary method; the LOI sets an EV by multiple on normalized EBITDA (not DCF). |
| Discounted cash flow (DCF) | Income (projection and discount) | Sanity check or when the business has projectable growth that justifies a premium | Validate the multiple against intrinsic value; rarely the anchor because history is short or opaque. |
| Asset value | Assets (net value) | Transactions with material physical assets (trucks, machinery, real estate) | Floor in a going concern; the buyer may price assets separately from earnings flow. |
EBITDA normalization is the most important input for any valuation in this context. Reported EBITDA that includes owner compensation, personal expenses, and related-party operations produces an inflated valuation that collapses in due diligence. Defensible valuation starts with defensible earnings. For the conceptual base of the multiple, see Normalized EBITDA and EBITDA multiple. The EBITDA calculator provides the base; normalization is built with the advisor and validated in due diligence.
What are the limitations of the valuation number?
Valuation is an EV, not a check. A valuation of MXN 10,000,000.00 does not mean the seller receives MXN 10,000,000.00 at closing: it means that total consideration across all tranches equals MXN 10,000,000.00 if all conditions are met. Those tranches include:
- Cash at closing
- Seller note
- Contingent earnout
A higher valuation with a poor consideration structure — little cash at closing, long note, heavy contingent tranche — can deliver less real value to the seller than a lower valuation with a clean structure.
Valuation reflects normalized, historical earnings; it does not guarantee future results. If the business deteriorates between LOI signing and closing, the buyer will renegotiate or walk away. That is why the number must be supported by documented normalized EBITDA and a consideration structure the seller understands and accepts.
What do buyers and sellers ask about business valuation?
- How is a business valued in Mexico for a sale?
- In practice, the main method in the Mexican SME segment (EBITDA between MXN 2,000,000.00 and MXN 15,000,000.00) is the multiple of normalized EBITDA: enterprise value = normalized EBITDA × multiple. The multiple is derived from comparable transactions. The LOI sets an EV derived from that multiple, not from a DCF. EBITDA normalization is the critical input: reported EBITDA without adjustment produces a valuation that does not survive due diligence.
- Is enterprise value (EV) what the seller receives in cash?
- No. EV is total consideration, not the check at closing. A valuation of MXN 10,000,000.00 means that the sum of all tranches — cash at closing, seller note, contingent earnout — equals MXN 10,000,000.00 if all conditions are met. A higher valuation with a poor structure (little cash at closing, long note, heavy contingent) can deliver less real value to the seller than a lower valuation with a clean structure.
- Why might my valuation differ by buyer?
- Because value depends on method, earnings base, and purpose. A financial investor discounts risk more and may use a lower multiple; a strategic pays a premium for synergies or to remove a competitor; a creditor values for collateral and focuses on assets and cash flow for debt service. Same business, three different numbers. In M&A sale what matters is a defensible, documented valuation that survives the buyer’s scrutiny.
- What valuation method does a buyer use in due diligence?
- The buyer (and the lender) emphasize the EBITDA multiple applied to normalized EBITDA. In due diligence they verify line by line the bridge from reported to normalized EBITDA; unsupported adjustments are excluded and EV is recalculated at the same multiple. DCF is sometimes used as a sanity check to validate the multiple against intrinsic value, but rarely as the anchor in Mexican SMEs because the financial history is short or opaque for reliable projections.
In this glossary:
Normalized EBITDA — base of the most used multiple.
EBITDA multiple — primary method in Mexican SMEs.
Customer concentration — risk factor that compresses the multiple.
DCF — income method used as a sanity check.
Earn-out — affects real value received.
LOI — where enterprise value is agreed.
Investor list — early access to deal flow in Mexico.
Sources
- Rosenbaum, Joshua & Pearl, Joshua — Investment Banking, 3rd ed. (Wiley, 2022) — chapters on valuation methods
- DePamphilis, Donald M. — Mergers, Acquisitions, and Other Restructuring Activities, 10th ed. (Academic Press/Elsevier, 2022) — chapters on valuation approaches
- Kreischer Miller — Private Company M&A Trending Multiples through June 2023 (2023), analysis of EBITDA and revenue multiples in private transactions.
Business valuation in Mexico is mainly a multiple of normalized EBITDA applied in a transaction context; understanding the methods and what actually drives value received is key to maximizing the outcome of a sale. For a full picture of how it fits into the sale process, see the guide to business valuation methods in Mexico: when to use each.
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