A precise business valuation is essential for strategic decisions in various phases of a company’s development. Whether it is a planned sale, a succession arrangement, a merger or attracting investors – the valuation forms the basis for determining the actual value of a company. Since every company is unique, the valuation must be conducted individually and in a structured way in order to take all specific potentials and challenges into account.
Our fiduciary company supports you in this process with experienced professionals. Thanks to our market knowledge and expertise, we ensure a realistic, market-based company value that serves as a solid foundation for important decisions. A business valuation serves numerous purposes:
- Succession planning: For a fair transfer, especially in family successions.
- Sale: As a negotiation basis for an optimal price.
- Mergers and acquisitions: To determine a fair value in the event of mergers.
- Investor inquiries: To provide a solid basis for investment discussions.
- Taxation: For an accurate assessment of tax obligations, e.g. in the case of inheritance or gifting.
Company value vs. company price
A common confusion in business valuation concerns the terms company value and company price. Even though they are often used synonymously, they differ in their approach and calculation:
- Company value: The theoretical, calculated value of the company, often based on financial ratios and future prospects.
- Company price: The actual price achieved in a sale, which is influenced by supply and demand.
While the company value is more of a technical and objective calculation, the company price is the result of a negotiation between seller and buyer. This price can be influenced by subjective factors, such as the strategic importance of the company for the buyer or special market conditions.
Tip: Get support from experts for your business valuation. As an experienced fiduciary company, we guide you through the entire process and advise you comprehensively on all methodological and strategic questions. Feel free to arrange a non-binding initial consultation to learn more about our services.
Methods for business valuation
There are various methods for calculating the value of a company. Each method has its own advantages and disadvantages and may be more or less suitable depending on the company. The choice of the appropriate valuation method depends heavily on the company structure, market conditions and the objectives of the valuation. Below, we give you an overview of the most common methods:
Net asset value method
- Considers the company’s assets, minus its liabilities.
- This method is particularly suitable for companies with a high level of fixed assets, as it calculates the value based on the capital currently available.
- Advantage: It forms a lower limit for the company value, as this should never fall below the net asset value.
- Disadvantage: Intangible values such as customer relationships or employee know-how are not taken into account.
Earnings value method
- Here, the company’s future earnings power is the focus. The value is derived from the sustainably achievable profits.
- This method is suitable for companies that expect stable or growing profits.
- Advantage: Focuses on future earnings and allows for a good assessment of long-term potential.
- Disadvantage: Fluctuating profits or uncertain future prospects can complicate the valuation.
Practitioner’s method
- This method combines the net asset value and earnings value methods and is a popular approach for small and medium-sized enterprises (SMEs).
- Advantage: Its combination of values makes it versatile and particularly well suited for SMEs.
- Disadvantage: It can lead to inaccurate results if the company has special assets or exceptional earnings potential.
Discounted cash flow method (DCF)
- With this method, the company’s future cash flow is calculated and discounted back to the valuation date. It requires precise financial planning.
- This method is particularly suitable for established companies with stable cash flows.
- Advantage: Provides a comprehensive picture of future cash flows and enables detailed planning.
- Disadvantage: Very time-consuming and dependent on the accuracy of forecasts.
Multiples method
- Here, the company value is calculated based on comparative figures from similar companies. Typical metrics are revenue, EBIT or EBITDA.
- Advantage: Quick and easy to apply, particularly suitable for industries where comparative values are available.
- Disadvantage: Dependent on the availability and comparability of data; market fluctuations can strongly influence the value.
Each of these methods delivers a different result, and the true value of a company often lies within a corridor between the individual calculation results. Our fiduciary company therefore often recommends applying a mix of methods in order to obtain the most realistic company value possible. This way, you can ensure that the calculated value reflects the actual circumstances as accurately as possible.
Which method is suitable for your company?
Since each valuation method has specific advantages and disadvantages, it is advisable to choose a mix of methods as the preferred approach. A single valuation procedure can rarely capture all aspects and particularities of a company, especially when it comes to small and medium-sized enterprises (SMEs). With a mix of methods, you can combine different perspectives and thus achieve a balanced assessment of the company value.
Mix of methods
A comprehensive mix of methods can offset the weaknesses of the individual procedures. For example, it often makes sense to consider both the earnings value and the net asset value together in order to incorporate both the economic substance and the earning power of the company. This creates a solid foundation that provides robust support for both price negotiations and strategic decisions.
Market and risk analysis
In addition to choosing the right valuation methods, market analysis and risk assessment also play a key role in business valuation. The aim here is to examine how the company is positioned in the market and what opportunities and risks exist. Factors that significantly influence the company value include:
- Diversification: A broader setup – e.g. through different products or markets – reduces risk and can increase company value.
- Dependence on certain customers or markets: A high share of revenue generated by a single customer or market can be seen as a risk and have a negative impact on value.
- Competitive position: Market positioning, e.g. as a market leader or niche provider, also plays a role in the valuation.
- Future potential: The ability to grow in new markets or through product innovations can significantly increase the value of the company.
A thorough market and risk analysis makes the valuation more realistic and closer to the market. Our team of experts can support you with this analysis to ensure that all relevant factors are incorporated into the valuation.
The business valuation process – step by step
To carry out a sound and market-oriented business valuation, it is advisable to follow a structured valuation process. This process consists of several steps that ensure all relevant data and factors are taken into account and that the final company value is well documented.
1. Selection of valuation method
The choice of valuation method depends on the objectives of the valuation and the specific situation of the company. A company with a high level of fixed assets can rely more heavily on the net asset value method, while service providers are often valued using the earnings value method. However, a suitable mix of methods that covers different perspectives usually provides the most reliable results.
2. Adjustment of financial statements
In order to assess the company’s true economic performance, it is often necessary to adjust the tax-optimised accounting records. This involves filtering out, for example, extraordinary items, one-off purchases or non-operating expenses. These adjustments ensure that only sustainably achievable earnings are included in the valuation.
- Hidden reserves: These must be disclosed in order to obtain a complete picture of the asset situation.
- Deferred taxes: Correct consideration avoids surprises due to future tax obligations.
3. Valuation and calculation
In this step, the actual calculation of the company value takes place based on the selected methods. The defined mix of methods is applied and all relevant figures and factors are taken into account. The results should then be checked for plausibility to ensure that no methodological errors or unrealistic assumptions distort the value.
4. Interpretation of the results
Interpreting the valuation results is crucial for placing the determined company value into a market-oriented context. The value drivers are analysed and it is examined whether the calculated values reflect the actual market situation. Factors such as growth potential, market position and competitive situation should be considered.
5. Final report and documentation
At the end of the valuation process, a detailed final report is prepared. This report documents all assumptions, calculations and results so that the valuation is also comprehensible for third parties. A well-structured final report can be of great importance not only in price negotiations but also in legal and tax matters.
The final report includes:
- an overview of the methods used,
- the calculation results and their justification,
- a summary of the value-driving factors,
- as well as an assessment of the market situation.
Business valuation in practice – use cases and pitfalls
A business valuation is not only highly relevant when selling a company, but also in other business and legal contexts. The most important use cases and common pitfalls are summarised here to give you a practical overview.
Succession planning and inheritance
For companies that are transferred as part of a family succession or an inheritance, an accurate business valuation is essential. It ensures a fair and transparent transfer in which all parties involved – especially descendants – are treated equally. An inaccurate valuation can later lead to legal disputes, for example over inheritance claims.
- Fair price determination: An objective valuation helps avoid misunderstandings and disputes among heirs.
- Tax aspects: In the event of a transfer, tax obligations must be considered, which are often linked to the value of the company.
Company sale and price negotiations
Another central use case for business valuation is the sale of the company. The determined company value serves as a starting point for price negotiations and helps to put the sale price on a solid footing.
- Negotiation advantage: A clearly documented company value gives the seller a strong position in negotiations.
- Market alignment: A realistic company value prevents the company from being sold below value or potential buyers from being deterred by excessive price expectations.
Taxation and legal aspects
Taxation also plays an important role in the transfer or sale of a company. A transparent and comprehensible valuation ensures that no unexpected tax burdens arise for the new owner.
- Inheritance and gift tax: The company value is often the basis for tax calculations due in the case of inheritance or gifting.
- Legal protection: A well-founded valuation protects both parties from later legal disputes.
Share trading and employee participation
In larger companies, the company value is also an important basis for valuing shares and their market price. Regular valuations help to determine the current value for employee participation programmes or share trading.
- Transparency for shareholders: A clear company value builds trust among shareholders and potential investors.
- Planning reliability for employees: For employee participation schemes, the company value can serve as a basis for incentives and thus increase motivation within the company.