Valuing a Spanish SME is not the same as valuing a listed company. Academic methods have serious limitations when applied to the middle market. We explain why and what approach works in practice.
Few issues generate as much friction in a business sale as valuation. The entrepreneur has a figure in mind — often based on what they believe the company is worth rather than what the market will pay. The buyer has a different figure, supported by financial models. Between the two, there is frequently a chasm.
The problem is not that the entrepreneur is irrational or the buyer is cheap. The problem is that valuation methods taught in business schools were designed for listed companies with perfect information, liquid markets, and multiple potential buyers. None of those conditions exist in a Spanish middle-market SME.
The discounted cash flow (DCF) is the star method of valuation theory. It works reasonably well for listed companies. For a Spanish SME, it has serious problems: projections are speculative, the discount rate is arbitrary (with illiquidity premiums, size premiums, and founder dependency premiums potentially pushing it to 15-25%), and the terminal value typically dominates the result (60-80% of total valuation), meaning most of the value rests on a ten-year estimate for a company that cannot predict next year’s revenue with certainty.
The multiples method is more intuitive and more widely used in practice. But in the Spanish middle market, it has significant pitfalls: the reported EBITDA of a family SME rarely reflects the normalised EBITDA a buyer will calculate (the gap can be 20-40%); comparable transactions are rarely truly comparable; and multiples do not capture factors like client concentration, founder dependency, or asset quality.
Book value is almost always insufficient as a standalone method because it fails to capture intangible assets. However, it serves as a useful floor. If a DCF or multiples model yields a valuation below the adjusted liquidation value of assets, something is wrong with the model.
At Blue Mountain, our approach combines elements of all three methods with a pragmatic focus that prioritises reality over models.
Step 1: Normalised EBITDA from the last three years, adjusted for non-recurring items, real founder remuneration, and costs that will appear or disappear post-acquisition.
Step 2: A range of multiples based on real sector transactions, adjusted for the company’s specific characteristics — size, growth, team quality, client diversification, founder dependency. The range typically falls between 4x and 7x normalised EBITDA.
Step 3: A DCF as a cross-check, not as the primary method. If it diverges significantly from multiples, we investigate why.
Step 4: Common sense. What would we pay without a financial model in front of us? What is the maximum price at which the deal still makes economic sense? What is the minimum price the entrepreneur would accept?
This last point is important. Valuation is not an academic exercise. It is a negotiation tool. The best negotiation finds a price that works for both parties.
Dirk Manuel Martens Jimenez Founder, Blue Mountain Capital
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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