Valuing a company in a cross-border acquisition

Quick answer. Valuing a foreign target rests on the same methods as in France, discounted cash flows (DCF) and comparable multiples, but with four adjustments specific to international deals: a country risk premium added to the discount rate, currency risk, restatement of local accounts to a homogeneous base, and the taxation of profit repatriation framed by tax treaties. Neglecting these layers leads to overpaying.

Buying a company abroad, or acquiring a target from France, does not change the logic of valuation but complicates its execution. The cash flows to discount are denominated in another currency, the accounts follow other standards, and the taxation of profit repatriation differs by jurisdiction. The figure shown in a local sale memorandum is therefore almost never the real value for a French buyer: this gap, and how to measure it, is what this article details tier by tier.

Cross-border valuation relies on the classic methods, which must be mastered before adding the international layers.

The discounted cash flow method, or DCF, remains the reference: it projects future flows and discounts them at a rate reflecting the risk. The comparable multiples method completes the analysis by relating value to an aggregate, such as gross operating profit, from comparable transactions or companies. These two approaches frame a value range, and the quality of a diagnosis depends first on the soundness of the operating figures used, which means knowing how to read the target's income statement before projecting it.

The work specific to international deals consists of adapting each of these tools to the context of the target country, without changing their mechanics. You do not reinvent the method, you recalibrate each parameter.

The first cross-border adjustment concerns the discount rate.

A flow located in a riskier country must be discounted at a higher rate, by adding a country risk premium to the cost of capital. This premium reflects the political, monetary or legal instability of the target country, as well as sovereign default risk. The same flow is therefore worth less in an unstable economy than in a stable one, because its discounting is harsher. Calibrating this premium is one of the most sensitive points of the valuation: a two-point gap on the discount rate can move enterprise value by tens of percent, especially on long-growth flows.

The cost of capital must also take into account the local financing structure, the risk-free rate specific to the monetary zone concerned and local inflation, because projecting flows in local currency while discounting at a euro rate introduces a classic inconsistency. The consistency rule is simple: flows in local currency are discounted at a cost of capital expressed in that currency, flows converted into euros at a euro cost of capital.

Calibrating the country risk premium#

The country risk premium is not a figure you set by guesswork. You calibrate it from public, observable references, then you test its effect on the value.

As an order of magnitude, and purely for guidance, a developed and stable economy carries a near-zero premium, often under one point. An emerging economy most often sits in a range of two to eight points, and an unstable or crisis-hit jurisdiction may go beyond. These orders of magnitude are a starting point, never a truth: they are recalibrated case by case.

To set this figure, three families of reference points usefully cross-check one another:

• The sovereign yield spread, or the premium measured by the country's credit default swaps (CDS) against a benchmark bond.
• The sovereign rating assigned by the agencies, which ranks default risk.
• The cost-of-capital models that incorporate a country premium, cross-checked against reference databases on emerging markets.

Good practice is to retain a central value, then move the discount rate by plus or minus two points to measure the sensitivity of the value. If the resulting range is wide, the country premium is the decisive parameter of the valuation: it then deserves to be documented with particular care.

The currency of the flows is a dimension in its own right of the valuation.

A target that generates its flows in another currency exposes the buyer to currency risk: the value converted into euros varies with the exchange rate. The valuation must specify in which currency the flows are projected and at what rate they are converted, and consider several variation scenarios. For a lasting acquisition, this risk can be partly hedged with financial instruments, but it must first be identified and costed in the valuation, as it can significantly change the justified price. A target whose costs are in local currency but whose sales are in dollars or euros presents a currency profile very different from a fully domestic target: this mismatch between the currency of expenses and the currency of revenue deserves its own analysis.

Local accounts and the taxation of profit repatriation require careful restatement. This is often where most of the gap between sticker price and real value hides.

The target's accounts may be prepared under local standards different from French standards or IFRS. Before any comparison, they must be restated to a homogeneous base, neutralising the method differences on depreciation, provisions, finance lease treatment or revenue recognition. This work joins the consolidation logic described in our article on the European holding and IFRS consolidation.

Taxation is the other decisive layer, and it plays out at two levels. First, the local tax rate on the target's profits, which determines the net flow produced in the country. Second, the tax cost of repatriating those profits to France: withholding tax on dividends, mitigated by bilateral tax treaties, then taxation on arrival. On this last point, a French buyer holding its target through a company subject to corporate income tax may benefit from the parent-subsidiary regime: provided it holds at least 5% of the capital and keeps the shares for two years, dividends received are exempt from corporate income tax, apart from a share of expenses and costs fixed at 5% by article 216 of the French tax code. Within the European Union, the parent-subsidiary directive and article 119 ter of the French tax code further allow an exemption from withholding tax for a holding of at least 10% kept for two years. A profitable target whose profits are hard to repatriate, after a high withholding tax not covered by a treaty, is therefore worth markedly less than a target whose flows repatriate freely.

Our view: the error is almost never in the method#

A cross-border valuation rarely fails on the method, almost always on the adjustments. The mistake we see most often is applying a domestic DCF to a foreign target, without integrating country risk, currency and repatriation taxation, which mechanically leads to overvaluing. A second, quieter mistake is to forget that the value to the buyer depends on the holding structure: the same profit is not worth the same depending on whether it repatriates within a treaty framework or not.

Our approach is to start from the proven methods, then methodically layer each international dimension: country risk premium, currency, accounting restatement, taxation and treaties. We also draw attention to the controlled foreign company rules of article 209 B of the French tax code, which can reintegrate in France the profits of a foreign entity held at more than 50% and subject to a privileged tax regime. Under article 238 A of the French tax code, to which those rules refer, a regime is privileged where the entity bears tax at least 40% lower than it would have paid in France under ordinary rules, that is, it is taxed at less than 60% of the French tax. International due diligence, legal, tax and employment depending on the country, secures these assumptions. The cross-border acquisition often combines with structuring through a holding, which links the valuation to tax consolidation and the LBO. Well conducted, the valuation becomes a negotiation tool, not a mere formality.

A French group wanted to acquire a target in an emerging country and had valued it with a DCF calibrated as in France, on the strength of the local memorandum. Our analysis revealed three blind spots. First, the absence of a country risk premium, which strongly overvalued the flows: raising the discount rate brought enterprise value down sharply. Second, a high, poorly anticipated withholding tax on dividends, which reduced the net flow actually repatriable to France. Third, part of the target's costs were in local currency while its sales were denominated in dollars, creating an uncosted currency risk.

After reintegrating these adjustments and examining the applicable tax treaty, the justified value fell appreciably against the asking price. The buyer renegotiated on this basis, and structured the acquisition so as to benefit from the parent-subsidiary regime on future distributions, rather than suffer a penalising repatriation tax. The value was not cut at random: it was cut line by line, which makes it a solid, documented negotiation argument.

In practice: securing a cross-border valuation#

• Check the currency of the flows and apply the consistency rule: flows and discount rate in the same currency.
• Calibrate the country risk premium from public references and test its impact by moving the discount rate by plus or minus two points.
• Restate the local accounts to a homogeneous base before any multiple, isolating depreciation, provisions and finance leases.
• Map the repatriation taxation: local tax rate, withholding tax, applicable treaty, eligibility for the parent-subsidiary regime.
• Check exposure to article 209 B if the target is in a low-tax jurisdiction.
• Document every assumption: this file then serves the negotiation and the due diligence.

Treaty eligibility documents#

The benefit of a treaty, a reduced withholding rate or an exemption, is never automatic: it has to be proven. Before retaining a treaty rate in the valuation, check that the following documents can be gathered when distributions are made.

• A tax residency certificate for the beneficiary company, issued by its tax authority, confirming that it does fall under the treaty invoked.
• A beneficial ownership declaration for the dividends, to rule out treaty shopping and establish that the beneficiary is the actual recipient of the flows.
• The treaty benefits claim form specific to the source state, to be filed in the local form and within the local deadlines so as to obtain the reduced rate at source rather than a later refund.
• Where applicable, the supporting evidence that the substance and holding-period conditions required by the treaty or by domestic law are met.

A treaty rate retained in the valuation without these documents being accessible is a fragile assumption: better to identify it before closing than to discover a full-rate withholding tax after the fact.

• Discounting flows in local currency with a euro cost of capital is a frequent inconsistency that distorts the value: always align the currency of the flows and of the rate.
• The country risk premium must not be applied twice, once in the rate and once in an overall discount: choose where it applies.
• The parent-subsidiary regime requires a holding of at least 5% kept for two years; the intra-EU withholding exemption of article 119 ter requires 10% and two years: these thresholds are not the same.
• A target in a country with a privileged tax regime may bring the buyer within the scope of article 209 B: to anticipate before closing, not after.
• Unrestated local accounts make any comparable multiple misleading: a multiple on a non-normalised EBE means nothing.
• A tax treaty does not apply automatically: its benefit requires conditions of form and substance to be checked upstream.