Business valuation

Determining the value of a company is anything but straightforward. There is no such thing as an objectively ascertainable enterprise value, and sellers and buyers often have very different ideas of what a company is worth. The current owner, often the entrepreneur, will mainly look to the past. His or her subjective enterprise value will factor in all of the time, work and capital that went into making the business what it is at the time of the transaction. So the seller’s enterprise value has an emotional component. As a result, it is usually much higher than the value to the buyer, who will naturally see things from a different perspective. A buyer undertaking a business valuation is mainly interested in the future of the company and the business opportunities it will bring. His or her focus will be on the income that the company will generate in the future and how he or she can refinance the purchase price.

In situations like this, an independent business valuation carried out by a neutral certified public accountant helps establish common ground. The accountant prepares a valuation report as the basis for purchase price negotiations. While there are no legally binding rules for ascertaining enterprise value, there are a number of established valuation methods that can be used to determine an enterprise value which is fair to both seller and buyer. A purchase price is ultimately the result of negotiations between buyer and seller, that is to say a product of supply and demand.

Methods

Methods of business valuation

The following business valuation methods have become well established:

The multiples method: The basis for determining enterprise value using the multiples method is the company’s earnings before interest and taxes (EBIT). The valuer also incorporates imputed costs, such as imputed owner’s salary, into the valuation. The formula applied in this business valuation method uses an average of the company’s income or profit from a total of six financial years: actual income or profit for the last two years and forecast income or profit for the current and next three years. This is used to calculate the company’s “sustainable income” or “sustainable profit”. A coefficient, called the multiplier, is then applied to this figure. The multiplier reflects opportunities in the relevant industry and varies from industry to industry.
The dividend discount method: Particularly where there are disputes, the dividend discount method is often used for business valuation in accordance with standard IDW S1 of the German Institut der Wirtschaftsprüfer (Institute of Public Auditors). Here, expected profit is viewed as an appropriate rate of return. Earnings should cover all interest and principal repayments and finance new investments. Future capitalised earnings value is central to this valuation method. So when using the dividend discount method, the first step is to calculate average profit over recent years. Past net operating profit is then used as the basis for calculating future earning power and to plan earnings over the years to come. Enterprise value is determined by discounting forecast net income at a base rate which includes a risk premium.
The asset-based approach: The asset value is the amount a buyer would need to spend to establish a comparable company under very similar economic conditions. The first step in calculating asset value is determining partial reproduction value. This value includes the replacement values of all of the company’s necessary net operating assets, such as its inventory, vehicle fleet or machinery. The liabilities that would pass to a buyer acquiring the company are deducted from this figure. The next step is to add in the company’s intangible assets. The result is the full reproduction value. A variation on the asset-based approach involves determining the company’s liquidation value. Here the company’s assets are valued using the sales prices that could be achieved on the market and sometimes lower sales prices. This allows a floor value for the company to be determined.

Determining and safeguarding value: business valuation with Schultze & Braun

Schultze & Braun is a reliable partner on your side for business valuation – whether you need a valuation as seller or buyer and regardless of which established valuation method is required in your specific case. Our teams of certified public accountants and business valuation professionals can prepare both indicative valuations and valuations in accordance with the Institut der Wirtschaftsprüfer in Deutschland’s IDW S1 standard.

To determine the purchase price of a business, our experts first carry out a full analysis of the company and its data. This analysis is the basis of the business valuation. We look at figures and data from recent years and estimate the company’s potential results in the years ahead. We determine the opportunities and risks for the company’s business model taking into account cost structures, potential turnover, company assets and debt. We also include other factors – such as a reasonable remuneration for the previous business operator, the likelihood that a suitable successor can be found, arrangements for financing the purchase price, and other potential influencing factors, for example the prospects for the industry as a whole and the image of the industry and the business.

The result is a robust and reliable foundation for negotiating the sale or purchase of a company.

You can count on us.

Contact

Oksana Miglietti
Wirtschaftsprüfer (Chartered accountant), Steuerberater (Tax consultant), Dipl.-Kauffrau (FH) (certified business accountant)

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