Portuguese SMEs Still Manage to Cut Taxes, Not Build Value, Consultant Warns

Why Portuguese SMEs Are Optimising Tax Instead of Enterprise Value

Many Portuguese small and medium-sized companies only ask what their business is worth when a buyer appears or when they need financing. Virgínia Duarte, coordinator of the Corporate Finance area at Yunit Consulting, argues in an interview with Forbes Portugal that valuation should instead work as a permanent management tool: it shows owners where they are creating value and, above all, where they may be quietly destroying it.

Her description of the Portuguese mid-market is blunt. Businesses with turnover between €2m and €10m often manage the accounts to present a low accounting EBITDA — sometimes below 5% — simply to reduce the annual IRC tax bill. In an illustrative example, an industrial SME in the north of Portugal reports EBITDA of €100,000 and, using a sector transaction multiple of five times EBITDA, the owner assumes the company is worth roughly €500,000.

But after an investor normalises that EBITDA through add-backs — removing non-operating expenses, adjusting salaries that are outside market conditions and correcting working-capital effects — the real operating EBITDA may come out at €350,000. At the same multiple, that pushes the valuation to about €1.75m. The opposite failure also exists: companies that show attractive margins can lose 20% to 30% of a preliminary valuation when bank due diligence finds that free cash flow and working capital do not reconcile, exposing an illusion created by suffocating payment terms.

In a market where more than 90% of Portuguese companies remain heavily dependent on traditional bank credit and relatively distant from private equity or M&A alternatives, Duarte says owners are often unaware for years of what actually determines their company's economic value. Factors such as founder dependence, customer concentration, revenue predictability, management autonomy, scalability and the quality of governance can move a multiple just as much as the headline financial result.

The Valuation Gap Between Tax Reporting and What Buyers Actually Pay

The Tax-Minimisation Trade-Off in Portugal's SME Sector

For an owner-manager, a lower reported profit has a direct short-term benefit: less IRC to pay. Duarte's warning is that this fiscal reflex has an unintended valuation consequence. The market does not price the annual tax return; it prices the company's sustainable capacity to generate earnings and cash over time. The same accounting choices that shrink the tax bill can therefore leave owners with a distorted sense of what the business is worth, a problem that surfaces only when a buyer or lender starts asking better questions.

How Normalised EBITDA Changes the Valuation Arithmetic

The most concrete part of the interview is the normalisation exercise. Reported EBITDA of €100,000 becomes €350,000 once non-operating costs, below- or above-market owner pay and working-capital distortions are corrected. At a five-times sector multiple, the implied value moves from around €500,000 to around €1.75m. This is not a promise that every company is worth more than its accounts show; it is a reminder that fiscal reporting and investor-grade reporting are different exercises.

When Reported Margins Are an Illusion

The reverse case is equally damaging. A company can present healthy operating margins while paying suppliers on punishing terms, so the EBITDA does not convert into free cash flow. When due diligence reconciles working capital and cash generation, Duarte says the preliminary valuation can fall by 20% to 30%. The interpretation here is important: profitability without cash conversion is a fragile basis for value, and buyers check the mechanism, not just the margin.

Founder Dependence and Succession as a Valuation Penalty

Two companies with similar financial results can receive very different valuations. One is autonomous, with recurring or contracted revenue, a diversified client base, systematised processes and clear governance. The other depends on the founder for client relationships, technical knowledge and daily decisions. The second carries what Duarte calls key-man risk: a buyer must assume the business may not perform after the founder leaves. For family-owned SMEs, the absence of a succession plan does not just create operational uncertainty; it can change a sale from a strategic option into an urgent necessity, weakening the seller's negotiating position.

What SME Owners Can Do Before a Sale or Capital Raise

• For an SME with €2m–€10m turnover, produce a normalised operational EBITDA alongside the fiscal EBITDA: remove non-operating expenses, adjust owner remuneration to market rates and correct working-capital distortions before assuming what the company is worth.
• Check whether the current operating margin actually converts into free cash flow. If supplier payment terms are flattering the margin but strangling cash, fix that gap now rather than letting a future due diligence cut 20–30% from the valuation.
• Reduce key-man risk by transferring client relationships, operational decisions and critical knowledge to a wider management team, and start succession planning years before any intended sale or handover.
• Treat valuation as an annual management tool: test capital investments against whether they will produce a return on invested capital above the cost of capital, and track customer concentration, revenue predictability and governance quality in the same review.
• Because the article places more than 90% of Portuguese companies in traditional bank-credit dependence, owners considering a future sale or capital raise should prepare financials and governance early to negotiate from strength instead of from urgency.