This content is from: Local Insights


Colombian companies are increasingly looking forward to expanding their capacity into new markets and increasing their local capacity. The merger of companies is a useful instrument to enhance this capacity.

In Colombia, the authorization for a merger must be granted by the Superintendency of Corporations regarding corporate matters, while the Superintendency of Industry and Commerce looks at the application from a competition point of view. Documents required by the Superintendency of Corporations to authorize a merger include the financial statements of the companies involved in the merger operation and the valuation of the assets and liabilities contained in them.

The purpose of this valuation is to establish the economic reality of the companies involved in the merger operation, because often the value of the shares or paid-in capital in the balance sheets does not reflect the real economic status of the company.

Though the Superintendency of Corporations does not require the merging companies to use a specific valuation method, it recently issued a guideline to companies suggesting different alternatives. The main methods used in the valuation of a non-publicly held company are the following:

  • debt inclusion: under this method the real value of a company can be measured by the amount of financed assets. The correct use of indebtedness can increase the income of a company, because the cost of the capital is lower when the company uses a correct leverage than using its own financing;
  • future profits: the actual value of a company is determined through an estimation of the future profits that the company expects to achieve. The method brings an actual value considering a discounted annual rate (taking into account distortions such as inflation and devaluation) of the future company profits and measured by the level of past and expected growth;
  • revenues: the valuation for this method consists of calculating the actual and future revenues of the company considering a discounted annual rate to bring the calculation to the actual value of the assets;
  • cash flow: the income effectively gained by the company reflects the real value of the assets. The method consists of obtaining the actual value of the company's commercial operations and subtracting its debt. This is the most accepted method of valuation because it reflects the real and tangible assets and incomes of a company;
  • amortization of good will: under this method the value of a company is based on the idea that its goodwill — the difference between the price paid and the book value of the assets — must gradually be eliminated and therefore be subject to a correct amortization;
  • capitalization of extra profits: this method also establishes that the goodwill is subject to a redemption, but through an increase of the capitalization rate of the profits, resulting in the covering of the risk of uncertain future profits.

The method each company selects to value the real financial and economic capacity must reflect the real values. In Colombia it is not possible to carry out a merger with an asset-valuation scheme based on the book value of assets. It is advisable to bear in mind that applications for authorization of mergers by the Superintendency of Corporations cannot be filed without complying with these methods.

María Martínez

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