Prepare a business valuation or have it prepared
If you search the Internet for the terms "valuing a company" or "calculating the value of a company", "valuing a company" or "company valuation", you will find a large number of more or less suitable results. After an initial review of the search results, you should first ask yourself the following questions:
- Who can calculate the enterprise value for my business/ company?
- Which methods for calculating the value of a business or company are recognised, internationally common, relevant for my industry and which are most frequently used in the daily practice of business valuation or company valuation? Does a company valuation based on turnover and/or EBIT or EBITDA make sense? Is there a rule of thumb for calculating the company value? Is there one correct way to calculate the value of a company?
Who can calculate the enterprise value of a business or a company?
- After studying the relevant literature on the subject of company valuation and equipped with basic mathematical knowledge, anyone can - with a little practice - calculate the value of their company themselves. This statement is at least always true if you are familiar with accounting issues and have the time
- Furthermore, auditors and tax advisors come into question, who usually calculate the enterprise value according to the procedures approved by the Institute of German Auditors (IDW). A so-called objective enterprise value is calculated
- Corporate finance advisors or M&A advisors also calculate the enterprise value. This group of advisors also calculates the enterprise value according to the procedures approved by the Institute of German Certified Public Accountants (IDW). These procedures and their application are described in detail in the document IDW S1. Corporate finance advisors/ M&A advisors also carry out a valuation using a comparative company approach.
In addition to the application of the comparative procedures, this group of advisors prepares a detailed analysis of the company and the market environment in order to verify and, if necessary, adjust the target figures. In the text part of the company valuation, this advisory group goes into detail about the strengths, weaknesses, opportunities and threats of the company to be valued. With the comparative procedures, a so-called subjective enterprise value is calculated
Which methods for calculating the value of a company are recognised, internationally common, relevant for my industry and which are most frequently used in the daily practice of company valuation?
In the context of company acquisitions and sales, private equity transactions, management buy-out and management buy-in scenarios, several procedures are usually used to show a realistic range for the company value. The most commonly used valuation methods in daily practice are: Discounted Cash Flow (DCF) method and multiple method. In the discounted cash flow (DCF) method, the free cash flows of the future are discounted to the present day.
An initial overview of the discounted cash flow method can be found, for example, on Wikipedia. In the multiple method (or multiples method), the company to be valued is compared with comparable companies. This is done on the basis of comparable M&A transactions (recent acquisition method) and on the basis of comparable listed companies.
As a rule, EBIT or EBITDA and turnover are compared in relation to enterprise value (EV). The result is multiples such as 7 times EBIT or 0.8 times turnover. In the next step, these multipliers are applied to one's own company and the value of the company is calculated.
Other methods of company valuation/company valuation include:
- Capitalised earnings method
- Asset value method
- Mean value method
- Stuttgart procedure
- APV method
- Real options procedure
- Rules of thumb such as x times turnover or x times EBITDA (usually when the goodwill is calculated online with a so-called goodwill calculator)
All procedures have their advantages and disadvantages. The advantages, disadvantages and the procedures will be discussed in one of the next articles. A first insight is provided by the explanations on business valuation at Wikipedia.
Determine company value yourself - high risk of overestimating the value of your own company by far
An overestimation of the company's value leads to a high risk for both the seller and the buyer. The seller loses time, money and nerves if he enters the process of selling the company with far too high purchase price expectations. As a rule, too high purchase price expectations lead to the seller "burning" his company on the market of potential buyers and no sale of the company takes place.
If the buyer pays too high a purchase price, he will either never be able to recover the purchase price or only after too long a period of time. Often the company that was bought at too high a price is sold on again far below the purchase price or high value adjustments have to be made, which in extreme cases cause the buyer considerable difficulties.
In principle, the following applies to pricing (company purchase/sale): there is no such thing as an objectively correct company value, regardless of the method used to calculate the company valuation. Before a planned company sale, the shareholders should have an independent company valuation prepared by an experienced M&A consultant. The company value determined in this way is realistic and can also be achieved in the event of a company sale.
Indicators for the costs of a professionally prepared company valuation
The cost of calculating a company valuation depends on a number of factors. The costs of a company valuation are influenced by: Is there a meaningful and detailed financial plan (P&L, balance sheet, cash flow statement), how complex is the company structure (subsidiaries at home and abroad), how transparent are the company's business figures during the year, how informative is the documentation on the company (product development, market and competition, management and employees, etc.).
The costs of a professional company valuation range between 8,000 and 25,000 euros. Online company value calculations are often free of charge, but they are also very rough and often incorrect.
KP TECH Corporate Finance
Have your company valued: Benefit from more than 20 years of experience in the valuation of companies. Contact us strictly confidentially at +49 (0) 89 21 53 66 09-0. Our team is on site for you in Frankfurt am Main, Munich, Berlin, Düsseldorf/ Cologne.
