Around 70 % of all entrepreneurs estimate the value of their company as too high. With this figure, Ingo Claus from KERN ? Unternehmensnachfolge ? opened his lecture on the topic of business valuation at the IHK Osnabrück ? Emsland ? Grafschaft Bentheim.
This overestimation often has serious consequences in practice. In the case of a planned sale of a company, an excessively high valuation often leads to excessive price expectations and thus to a Unsaleability of the company.
In a nutshell: How is the enterprise value calculated?
- The value of the entire company or a share in the company is determined by a company valuation.
- Material values, such as Vehicle fleet, machinery and land, as well as intangible assets, such as Know-how, brand, patents and experience of the staff are assessed.
- Different valuation methods take into account both the substance of the company and venture a forecast for the future on the basis of past earnings.
- The company valuation is indispensable for further negotiations - for example for a succession. It is admittedly not identical with the final purchase pricebut an important basis for the sale of the company.
- There are various methods of calculation that have individual advantages and disadvantages. The purchase price corridor determined by means of a well valid company valuation offers a negotiation framework.
- The The capitalised earnings value method has gained acceptance in Germany.
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Table of contents
What is the enterprise value
The enterprise value is a subjective valuation of all tangible and intangible assets of a company. This serves as a basis for negotiation in company transactions, but can also be used as a Key figure of a long-term corporate strategy serve.
However, the value of a company is not limited to the sum of all assets. The Position of the company on the market, good reputation or synergies must also be evaluated. There is no standard formula for this, but is rather subject to individual consideration by the evaluator.
If you use the Calculate enterprise value If you want to estimate the value of a company, various modelling methods can help you, but not every method is suitable for every situation. Moreover, all methods are based on subjective assumptions.
Therefore, buyers and sellers can arrive at different company values despite the same company figures. Even when selling a listed company, sales prices above market capitalisation are negotiated, although this is considered the best estimate of the company's value.
Excessive purchase price due to the so-called heart-blood return
While entrepreneurs value not only the tangible assets but also the work and their heart and soul.they have invested in the company, an acquirer thinks first and foremost about what profits he can generate with the company in the future. Because of this different perspective, both sides often come to very different conclusions.
The merchant pays nothing for the past!
Many business owners find it difficult to prepare a planning statement for at least the next three years. However, this outlook is of great importance, because it is true: the businessman pays nothing for the past!
Even if Enterprise value and purchase price not the same there is a very close connection. The credible derivation of the capitalised earnings value thus not only serves to determine the purchase price claim, but also to facilitate the negotiations. Enforcement of an attractive purchase price.
By the way, it is possible to increase the value of a company. Read about this:
How to increase the value of your business and prepare for business succession
Overview of valuation methods
Business valuation procedures for the company can be classified in various ways. On the one hand, business valuations for the continuation or the dissolution of a company can be distinguished. For the dissolution of a company, the Liquidation value as a form of Substance value methods be used.
Furthermore, a different data basis can be used for the valuations. The net asset value method uses balance sheet data for this purpose, while the capitalised earnings value and Discounted cash flow methods Use data from the P&L.
In order to arrive at a plausible and at the same time well-founded purchase price claim In order to prepare for the upcoming talks with potential buyers, a professional company valuation is necessary.
In most cases, entrepreneurs have no or the wrong idea of what disposal proceeds are realistic for their business. In addition, it is important to maintain an overview of the decisive factors in the valuation methods:
Looking ahead with the help of the capitalised earnings method
In addition to the net asset value and multiplier methods, the capitalised earnings method is used in particular for the valuation of companies in Germany. This is a Procedure accepted by business, chambers and tax authoritieswhich, when calculating the value of the company, adjusts the results of the past in order to subsequently forecast a future development that is as plausible as possible.
This is because the results of the capitalised earnings method are essentially dependent on a as objectified an estimate as possible of future surpluses of the company. Subsequently, the realistic risk assessment is particularly important for the capitalisation interest rate to be determined.
Tax office accepts conclusive income capitalisation approach
A conclusive value appraisal according to the capitalised earnings method is usually accepted by the tax office and is thus a good alternative to the method defined in § 199 of the Valuation Act (BewG)", underlines Ingo Claus. The value of the company is thus more oriented towards the market value. This is because the resulting lower tax burden or lower settlement sums vis-à-vis co-heirs thus lead to a lower financial burden for the companies to be transferred.
Example calculation of capitalised earnings value method
The value of a company of the example GmbH is to be estimated with the help of the capitalised earnings value method.
The following company figures are available:
- Annual surpluses (periods 1 to 5): 100, 105, 115, 125, 130
- Annual surpluses from period 6: 130 with 2.5 % growth per year
- Risk-adjusted discount rate: 6.5 %
This results in the following calculation:
- Discounting of annual surpluses from year 6:
130 / (0.065 ? 0.025) = 3250 EUR
3250/ 1.065^5 = 2372.11 EUR
- Discounting of the annual surpluses (period 1 to 5):
100/1,065 + 105/1,065^2 + 115/1,065^3 + 125/1,065^4 + 130/1,065^5 = 473,72 EUR
- Enterprise value = 473.72 + 2372.11 = EUR 2845.83
Advantages and disadvantages of the capitalised earnings method
Advantages:
Company valuation method widely used in Germany and accepted by the tax authorities
calculation compared to other methods slightly
Adaptable risk factor
Disadvantages:
Risk factor offers possibility of manipulation
Forecasting the future not always suitable
The net asset value method
The net asset value can be calculated for a going concern or a liquidation. In the latter case, the liquidation value is calculated. In order to calculate the liquidation value, the Fair values of all recognised and unrecognised assets added together and all outstanding liabilities deducted, because these must be serviced from the proceeds of the sale.
In addition, all costs incurred by the liquidation must be deducted. The The advantage of the net asset value method is a relatively simple calculation of the value of a company liquidation. In addition, this valuation method can serve as a lower limit of the enterprise value in the case of a going concern.
The actual asset value or going concern statics is not based on the assumption of a break-up of the company. It This is the following opportunity cost analysis: The value of the business is equal to the cost that would be incurred in creating an exact copy of the business. So if an equivalent property with equivalent real estate and with equivalent machinery were purchased.
This means that the net asset value is based on the Replacement value of the assets recognised in the balance sheet and of the off-balance sheet assets.
The restoration value must be distinguished from the liquidation value. The latter arises from the break-up of the enterprise and the subsequent Sale of the individual elements.
The liquidation value corresponds to the amount that can be achieved through the break-up of the company and the subsequent individual sale.
The liquidation value of the non-operating assets may additionally be recognised and the borrowed capital must be deducted. The asset value method also has the advantage that a going concern is assumed, which is the case in most corporate transactions.
However, one important factor is not considered: the ?know-how? of the old company. Because work processes and trained personnel with experience on these machines can neither be copied nor evaluated.
Advantages and disadvantages of the net asset value method
Advantages:
Simple calculation
"Tangible value" that is also suitable for laypersons
Disadvantages:
Neglecting factors such as customer base or competitive position
No consideration of profitability
Discounted cash flow method (DCF method)
In the discounted cash flow method, the free (available) cash flows are used as the starting point for the company valuation. The enterprise value corresponds to the sum of the free cash flows discounted with a risk-adequate interest rate.
For the estimation of free cash flows, the business plans of the following years can be prepared individually. Alternatively, the Value generators Rappaport process can be applied. Here, starting from current Data such as turnover, return on sales and investment in working capital and an estimated future growth in turnover.
The DCF method can be applied in 2- or 3-phase models. In the first phase the cash flows for the next 5 to 10 years are estimated individually. In the last phase, a constant free cash flow or a cash flow with constant growth is assumed.
The intermediate phase in the 3-phase model is intended to plausibly model a transition between the last planned phase and the residual value phase. This is usually based on a linear or Exponential diffusion of cash flows over 3 to 5 years gone out.
The Advantage of the discounted cash flow methods is that it is based on current company figures. This models the initial situation in the best possible way. However, the enterprise value depends strongly on 2 factors, the risk-adequate discount rate and the free cash flows in the first phase. An incorrect estimate of these leads to large deviations.
Advantages and disadvantages of the discounted cash flow method
Advantages:
Good adaptability to individual and current company situations
Result well comparable
Makes any risks of the investment clear at an early stage
Disadvantages:
Risk factor can be a weak point in case of poor choice
Forecasting the future not always suitable
Multiplier procedure
The multiplier method is a rough estimate of the enterprise value. Here the Stock market value and past corporate transactions analysed and related to balance sheet ratios. This is how common multipliers have developed. For an exact determination of the correct multiplier, only the corporate transactions of comparable companies are used.
These methods are particularly suitable for a Plausibility check of the enterprise value calculated with other methods. Nevertheless, the publicly available multiples always only represent valuation corridors of past transactions. Since a company is not arbitrarily comparable, corresponding adjustments and plausibility checks must be made in advance of a multiplier valuation. This must be taken into account.
Advantages and disadvantages of the multiplier method
Advantages:
Widely used assessment methodology
Can be calculated quickly and easily
Needs little data for first results
Disadvantages:
Due to the lack of data, not very accurate
Multiplier is a weak point that can be argued about
An application without appropriate analysis, subsequent adjustment and plausibility check often leads to significantly inflated company values.
The venture capital method
Start-ups can be valued using the venture capital method. The Value of these companies lies in the development of new concepts and technologiesnot in assets, sales or positive cash flows. Therefore, the previous valuation procedures cannot be applied.
Therefore, the value of the company is first calculated at a time when it is comparable to other companies, for example in 10 years. This enterprise value is then discounted over the assumed duration. However, a higher discount rate is used than for incumbents because the risk is much higher.
Since a valuation without numbers can often not be target-oriented, the venture capital method is often dispensed with in German-speaking countries and the DCF methodology described above is used instead.
Advantages and disadvantages of the venture capital method
Advantages:
Enables calculation despite missing data
Disadvantages:
Uncertain and complex
Company valuation according to the principles of the IDW
Multiples commonly used in the industry are often not sufficient to determine a company's value, as they are not tailored to the individual case and are often outdated. To determine a Company valuation according to the principles of Institute of Public Auditors in Germany (IDW) we analyse the annual financial statements of the past three financial years and create an earnings value with the help of corporate planning.
The capitalised earnings value is identical to the future distributable earnings discounted to the valuation date. The discounting is carried out using an interest rate adjusted to the respective entrepreneurial risk.
The principles of the IDW are the IDW-S1 = income capitalisation approach. This is the method of business valuation accepted by the tax office and excludes the typical errors of a multiplier valuation by a sound IDW-S1.
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Valuation SME
According to the Institute for SME Research (IfM), every year in Germany more than 20,000 SMEs are faced with an unresolved Company succession confronted. If you too want to change your Sell company the first step towards a regulated succession should be a well-founded evaluation of the company.
Since the methodologies for determining value are applied analogously to large and small companies, the question arises whether there are not a few Small but crucial differences in the valuation of SMEs gives.
Qualitative characteristics
The differentiation from large companies is not only based on key figures and financial parameters. This means that SMEs have a few very specific characteristicsthat work well in Ihlau, Duscha, Gödecke: Special features in the valuation of SMEs (page 6 ff.) be described. After that, the characteristics are to be divided into the 4 areas of business model, owner, information and financing.
For example, an elementary difference to large companies is the limited access to the capital market and the often low equity ratio. In addition, there is the strong influence of the owners and the lack of diversification. Simplified processes in accounting or a lack of corporate planning or simplified controlling bring the decisive differences to light.
Against this background, the question naturally arises all the more whether the Business valuation of SMEs not fundamentally different must/should be.
Business valuation of SMEs
In Moxter 1983, p. 123 the phrase "Valuing means comparing" comes up. This is the basic principle of any business valuation. It means, for example, comparing observable prices or returns for similar assets. Exactly on this point However, a valuation of large companies differs. Not in methodology, but in complexity.
Of course, a group valuation is highly complex and anything but trivial. Due to the lack of comparative values the valuation of an SME is no less complex. Due to their often very special and specific characteristics, SMEs in particular are only comparable to a very limited extent with the comparable companies used.
In Germany, the capitalised earnings method has become established for SMEs. This is based on the given valuation occasion in this environment. Unlike in the transaction environment, where the DCF gross method is mostly used, the valuation occasion for an SME is often a pending business succession.
Within this framework, it goes without saying that a sound analysis and the special circumstances of the SME are taken into account. The focus here is on the Determination of future achievable revenues (taking into account new or old holders) and a suitable risk-equivalent capitalisation rate.
The price for the company is ultimately the result of supply and demand and, of course, a well-managed negotiation.
Typical mistakes in business valuation
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Errors can quickly arise in business valuations. The typical errors can be traced back to three sources of error.
The use of inconsistent data:
- Use of inconsistent data (e.g. mixing real and nominal values)
- Use of indirect/calculated data leads to false dependencies (e.g. depreciation, interest and dividends do not directly depend on turnover)
The following factors are often neglected when discounting:
- Different risk-free interest rates for longer and shorter periods
- Distinction between secure and uncertain cash flows and their correct discount rate
Modelling error:
- Valuation model does not fit the future corporate strategy
- Valuation model does not fit comparable companies
- Company valuation is only prepared for one scenario, sensitivity analysis and Monte Carlo simulation are not used
Conclusion
If you want to carry out a suitable company valuation, for example for the purchase of a company, it is essential that you first check the Determine the objectives of the assessment and select an appropriate method for the purpose of the assessment.. As you have learned, there are big differences in the valuation of SMEs, large companies or start-ups.
For family businesses, the determination of the business valuation on the basis of the capitalised earnings value method is in many cases meaningful. We will be happy to assist you with this important topic.
