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Our previous posts already reported that the most popular process through which M&A transactions commonly initiate a business valuation, bases on simple multiple of earnings methods for a valuation that allows fixing the overall worth of the transaction. This is a quick, relatively easy formula (depending on many factors, not all multiples will be useful); however, we understand that it should not be taken as a dogma of faith as that system has certain limitations. This method is based on the fact that the market is a reliable indicator and that. Let’s explain this theory with a clear example: if my neighbour on the third floor has sold his apartment for 160,000 euros and my neighbours across the street have sold theirs in the same month for 162,000 euros, it means: if I want to sell mine… easy calculation: the previous amount will be the value I can give to my property. Most commonly used multiples in business valuation In the case of company acquisitions and reorganisations, the most "famous" multiples are the EV/Ebitda (enterprise value understood as the real price of its shares plus its debts divided by its EBITDA) and the PER (share price divided by profits). When it comes to M&A transactions in SMEs, it is very difficult to obtain these ratios for comparable companies. This is due to the fact that share prices in unlisted companies are difficult to obtain (and there are not many SMEs listed on the stock exchange). Similar transactions in the sector are usually observed (if this is possible, at all) and 'like-for-like' magnitudes are compared to the multiples described. One of the most common methods is to divide the transaction price by the EBITDA and find out how many "times" it has been paid for. Example of business valuation by multiples For example, if we imagine a business in a certain sector whose partners have decided to fix a price for the sale, the first thing they will do is to identify transactions of similar companies in their sector (if available). They obtain the following data: Let’s remove the lowest and highest value (transactions 5 and 10 respectively) to exclude those extreme amounts and obtain an average value of 6 times EBITDA. As a conclusion, a reasonable "market value" for the business would be to ask for 6 times the last EBITDA (or an average EBITDA or an expected EBITDA). This is just one example, depending on the sector, other multiples or combinations of multiples can be used. Other formulas can be applied as well; these practices are not strict "laws of physics". Moreover, depending on the sector, non-financial multiples are used (e.g. number of hotel rooms or number of users of the service of my business). Limitations of business valuation multiples However, this valuation by multiples has many limitations, among which the following stand out: It does not take into account the debt of each business acquired (acquiring a business with a very large debt is not the same as acquiring another with a cash surplus). The type of buyer (venture capital fund, industrial investor) is not evaluated. Each has a different strategy and objectives when acquiring a business and therefore, each case may have a different willingness to pay. Acquisition of real estate and/or intangible assets acquired together with the business may represent another issue that it not considered, here. EBITDA may be unadjusted and therefore include non-recurring or non-market items, depending on the nature of the business (e.g. directors' credit card expenses). The future prospects of each business are not known. When one acquires a business, the past is fine, but what is really important is what is expected to happen in the future. All these limitations can be summed up in the fact that, even if we were to accept that the companies in these transactions are comparable to our own, no two businesses are the same. And the fact is that, while my two neighbours have sold their houses for around 160,000 euros, it is possible that mine is worth 200,000 euros for example (it has a better orientation, a renovated kitchen and central heating). Moreover, be careful! Do not mix up value with price (I can offer my house on the market for 300,000 euros, while a multimillionaire comes along and buys it the next day for that price without asking further). Supporting business valuation by market multiples This does not mean that using multiples of Earnings Valuation is wrong or incorrect. In fact, it seems perfectly reasonable that, if transactions between companies of similar size in an industry have been taking place recently in the range of x times EBITDA, then my business transaction may move around those figures. But it would be appropriate to have the particular valuation of my business, which has specific conditions (customers, work methodology, future prospects, expansion plans, market power, backward vertical integration...), sustained by a discounted cash flow method (DCF) or any other method universally accepted in finance to support that valuation range by multiples, or justify that the valuation of my business is above market. The Discounted Cash Flow method DCF is a more technical, more “scientific” and more laborious method, but precisely for this reason, it provides a more objective value of the company or business within the subjectivity (it is based on premises) as well as being perfectly valid for SMEs. We at Carrillo Asesores are experts in M&A operations and business valuation. Please contact us. Our Tax Department will be more than pleased to assist you.

Blockchain technology has been on the rise for 13 years now (2009). For many users, it is still new or even difficult to understand. The truth is that it is a reality that has not been regulated to date, but requires a minimum of knowledge and an approach from a legal point of view. This will be the first of a series of posts published in the aim of using a simple and more accessible way to explain what this Blockchain technology consists of, what we know as "Tokenization" and the most important legal aspects it consist of. What is a Blockchain technology As a matter of facts, Blockchain technology is configured as a database. It is digital, immutable, shared, synchronised and decentralised. This technology allows the database to be located in the device of each user (node). The feature requires validation of each modification by the rest of the users; subsequently it does not depend on a central authority. It was created by Satoshi Nakamoto, the pseudonym of one or more people who preferred not to reveal their identity. Its first practical application was the purchase of a pizza. What was the purpose of Blockchain technology? The purpose of this technology was to achieve an electronic payment between individuals without the need for the intervention of intermediaries, thus saving the economic and time costs and obtaining the guarantees and security of a mathematical system. Evolution of Blockchain technology Reviewing the evolution of blockchain technology from its origin to the present, we can see that the first "Bitcoin" blockchain, version blockchain 1.0, was only intended for carrying out transactions. In other words, transmissions of Bitcoins between two "bitcoin addresses", each of which designates a subject, which are reflected in a kind of summary or document that is made after encrypting or encoding the transaction and which results in the "hash". What is a hash? Without going too deeply into computer or technological concepts and in order to understand what we mean when we talk about hash, it is necessary to know that Blockchain means "chain of blocks", each block integrates a group of transactions and each transaction is encrypted or summarised in a hash. The blocks are linked together, with the result that the "final or closing hash" constitutes the initial hash or first annotation of the next block. Merkle Tree In addition to the "chaining" of blocks, the differentiating elements of this first blockchain are: The so-called "Merkle Tree". This security element allows the hashes generated for each transaction to be combined with each other, creating a kind of tree and allowing any alteration that may occur to imply a variation of the Merkle Tree. This prevents the manipulation or falsification of any element by a hacker, as it would be detected, achieving an "unmodifiable" system. Traceability within the blockchain Finally, with this blockchain, the "traceability" of documents is achieved. It means that we can track or trace all the operations that a subject has carried out on the network since acquiring their first bitcoin. However, this total transparency that seems to emerge from the element of "traceability" is limited by the fact that it is possible to trace an asset, but not the identity of the person who owns it. Other popular blockchains As a result of this first blockchain, others were created based on its elements. The best known is undoubtedly the "Ethereum" network, blockchain version 2.0, which also has its own cryptocurrency. Hence, "Ether" is more complex, in addition to carrying out transactions on "ethers", creates and hosts Smart Contracts, which we will go into more specifically in our forthcoming publication. Afterwards, another feature called "Ripple" was created, which is configured as a payment protocol for financial institutions. It is a network for institutional payment providers and allows instant international payments with any cryptocurrency, although, like the rest, it also has its own cryptocurrency, XRP. Finally, and within the most popular blockchains, we also find "EOSIO", a decentralised blockchain infrastructure that offers a set of tools similar to those of computer hardware. This one aims to facilitate the development of decentralised applications (DApps) (blockchain version 3.0). "Stellar", closely linked to Ripple with a practically identical objective, to facilitate cross-border transactions with the target of making them faster, more secure and lower cost, but it is managed by a non-profit foundation. Blockchain version 3.0 is running currently. This is focused on the development of DApps or decentralised applications. What are DApps, blockchain 3.0? DApps are a special category of applications based on blockchain technology that operate in a decentralised network. The data generated by these applications is hosted on a network of computers that allows the information to be kept secure and accessible. The main difference between a Dapp and an App lies in the centralisation. In an App all decisions will be made on a central server and there is a manager with access to this data who can modify it. However, in a decentralised application there is no single manager who controls the application because it does not depend on a central server and the users themselves are the managers of the application. Do you want to know more about the legal aspects of the technology that is flooding the world's markets? Reach out for us. The legal team of Carrillo Asesores will study your specific case, we will be delighted to assist you with the technological development of your company.

A few days ago, we heard again about the 28 million € fine that the European Commission (EC) had imposed on the Japanese company Canon, for carrying out the acquisition of Toshiba Medical Systems Corporation (TMSC), a subsidiary of Toshiba. This was made without having received prior authorisation from the CNMC (Comisión Nacional de los Mercados y de la Competencia). This type of case is commonly known as “Gun Jumping”. What does Gun Jumping mean? Gun Jumping, in the words of the CNMC itself, "basically consists of executing an economic concentration operation, which should have been notified for prior authorisation, before the responsible authority (either the CNMC in Spain or the European Commission in Brussels) has given its approval. This practice is a breach of the Law on the Defence of Competition (LDC), as companies are obliged to notify their purchase operations to the CNMC before executing them when they exceed certain thresholds". Significant increase in Gun Jumping cases Gun Jumping cases have been progressively climbing up since 2014. They reached their peak in 2021, when a total of 19 Gun Jumping cases were registered globally. This is a significant increase considering that only 2 cases were registered in 2014. The details of the sanction against Canon for Gun Jumping Before we start to learn about the ruling, it is important to know the facts. The acquisition transaction by Canon, started in March 2016, when the two companies reached an agreement whereby the transaction would be split into two stages: Interim transaction In the first stage, Toshiba was supposed to transfer 95% of the shares of its subsidiary to a special purpose vehicle that was created specifically for this transaction. At the same time, Canon would acquire 5% of TMSC's shares and a call option on the vehicle company's shares for a total amount of 5.28 billion euros. The Japanese company submitted an initial pre-notification in March, notified the transaction in August and received EC clearance in September. Final transaction The second phase of the transaction did not start until December of the same year. Canon waited until then to obtain clearance from all merger control authorities for the Toshiba subsidiary to be incorporated as a subsidiary of Canon. However, in March 2016, an anonymous whistle-blower contacted the EC to inform them of these proceedings. It was in June 2019, three years later, that the European Commission took the decision to impose two fines on the Japanese company. One for failing to notify a concentration and the other for implementing a concentration before obtaining authorisation. These two fines were appealed by Canon to the General Court of the European Union (CJEU). They argued that the EC's decision was meaningless as the intermediate steps of the acquisition had already been implemented. The Court ruled this past 18 May in its case T-609/19, rejecting Canon's arguments on the basis of the case law already handed down in the Ernst & Young case. This case confirmed that the full acquisition of control of a company is not the only criterion by which mergers are assessed, but that it is also important to take into account whether the operation contributes to a lasting change of control of the company. Therefore, the latter criterion is the basis for the decision of the EUAT, i.e. that the first step was "necessary" to take full control of the company, so that Canon violated the European competition rules by carrying it out before notifying the transaction. When a merger occurs Furthermore, the Court added that, even if the transaction was divided into two distinct phases, it was still a single concentration. The first phase being a necessary and indispensable step in the implementation and contributing to the change of control of TSMC. In fact, in Council Regulation 139/2004, the EU already defined that: "A concentration shall be deemed to arise where there is a change of control on a lasting basis as a result of: A) the merger of two or more previously independent undertakings or parts of undertakings; or (B) the acquisition, by one or more undertakings, through the acquisition of equity or assets, by contract or otherwise, of direct or indirect control of the whole or parts of one or more other undertakings". Finally, if you want to know more about how to deal with a company acquisition process, either from the perspective of the buyer or the seller, do not hesitate to contact Carrillo Asesores. The experts of our Legal Department will be able to study the situation so that your company does not suffer the same fate as the case we bring you today. For sure, a transaction of such dimensions must be advised beforehand by expert lawyers and economists. We are at your service for whatever assistance you may need.