Before taking advantage of the Latin America business opportunities, one should complete a company valuation. Completing a valuation of a company in Latin America applies the same principles and procedures that would be used to evaluate a company in other countries. A potential difficulty facing an analyst within Latin America is the availability of quality and reliable information in order to accurately complete the valuation. With that in mind it is very important to employee the services of a Back Office company with experience in this type of activity in order to ensure that the valuation is completed accurately and truly represents the true value of the business.
Company valuations are normally calculated on the basis of either:
- Stock value (or market value), which is the value of the company if it were a public entity
- By the equity value (or book value), when the company is private.
A deep analysis will include an investigation of quantitative and qualitative elements of financial statements, environmental issues, industry specific considerations and main variables forecast (particularly income and cost forecasts). Given that information, an analyst will calculate expected cash flows, income, CAPEX and other variables, leading to the final valuation of the company’s net present value.
Difficulties With Company Valuations in Latin America
An issue facing the analysts within Latin America and the world, is that often company financial statements and cash flow forecasts are not always representative of the reality of either the company and/or industry (and instead include a degree of over optimism). Often the basis for this, is that reports are sometimes distorted in order to comply with Governmental regulations, to meet internal bench-marks / targets and/or to gain tax advantages. In addition to this, accurate and reliable industry information is not always available for all sectors, therefore, a large challenge for any analyst completing a valuation is to “clean” the available information of any identified distortions and to acquire accurate data to support the valuation premise. To achieve this, it is very important to have the support of the right Back Office Team that has the skills, experience and financial understanding.
Need For Due Diligence
To mitigate the risk described above, investors should do thorough due diligence using both industry and market research from independent parties. Although the work is expensive and time consuming, the the additional outlay will result in higher quality information and an improved and more accurate valuation. Hence it will ensure that the investment company is truly receiving value for money.
Need For a Back Office Service Provider
In conclusion, in order to ensure that the valuation of a company is accurate and truly reflects the company fundamentals, it is recommended that investors spend sufficient time and resources on the valuation; and use a credible team of analysts, supported by accurate and validated industry information in order to complete the valuations process.
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