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, 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. Tangible assets, such as the vehicle fleet, machinery and land, as well as intangible assets, such as know-how, brand, patents and employee know-how, are valued. Different valuation methods take into account both the substance of the company and past earnings.
The value of a company is indispensable for further negotiations. It is admittedly not identical with the final purchase pricebut an important basis. There are various calculation methods that have individual advantages and disadvantages. The capitalised earnings value method has prevailed in Germany.
Table of contents
- What is the enterprise value?
- Company valuation often too high
- Overview of valuation methods
- Valuation SME
- Typical errors
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 enterprise value is not limited to the sum of all assets. The company's position in the market, its good reputation or synergies between different assets must also be assessed. There is no standard formula for this.
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 having the same company figures. Even when selling a listed company, sales prices above the 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 that they have invested in the company, an acquirer thinks first and foremost about what he can earn with the company in the future. Due to 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 three years. However, this outlook is of great importance, because the following applies: The businessman pays nothing for the past! Even if enterprise value and purchase price are not the same thing, there is a very close connection. The credible derivation of the capitalised earnings value thus serves not only to determine the purchase price demand, but also to facilitate the negotiations. Enforcement of attractive conditions.
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
The procedures for valuing the company can be classified in various ways. On the one hand, a distinction can be made between valuations for the continuation or the dissolution of a company. For the dissolution of a company, the Liquidation method, a form of Net asset value method be used.
Furthermore, a different data basis can be used for the valuation. The net asset value method uses balance sheet data for this purpose, while the capitalised earnings value and Discounted cash flow method Use data from the P&L.
In order to arrive at a plausible and at the same time well-founded purchase price claim A professional business valuation is necessary to prepare for the upcoming talks with potential buyers. In most cases, entrepreneurs have no or the wrong idea of what sales proceeds are realistic for their company. In addition, it is important to have an overview of the decisive factors:
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, in determining 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 value method are essentially dependent on an assessment of the company's future surpluses that is as objective as possible. As a result, the realistic risk assessment is particularly important for the capitalisation 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 the capitalised earnings method
The enterprise value of the example GmbH is to be estimated using 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
The net asset value method
The net asset value can be calculated for a going concern or a liquidation. For the latter, the liquidation value is calculated. To calculate the liquidation value, the market values of all on-balance-sheet and off-balance-sheet assets are added together and all outstanding liabilities are 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 procedure 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 enterprise. It is the following opportunity cost consideration: The value of the enterprise corresponds to the costs that would arise if an exact copy of the enterprise were created. That is, 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 liquidation value of the non-operating assets can also 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. This is because work processes and trained personnel with experience on these machines can neither be copied nor valued.
Discounted cash flow method
In the discounted cash flow method, the free 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 generator method from Rappaport 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 discounted cash flow method can be applied in 2- or 3-phase models. In the first phase, cash flows are estimated individually for the next 5 to 10 years. 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. Here, a linear or exponential diffusion of cash flows over 3 to 5 years is mostly assumed.
The Advantage of the discounted cash flow method is that it is based on current company figures. This means that the initial situation is modelled as best as possible. 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.
The multiplier method is a rough estimate of the company's value. It involves analysing stock market valuations and past company transactions and relating them to balance sheet ratios. This is how common multiples have developed: For example, the gross enterprise value corresponds approximately to the turnover * 1.5 or the EBIT * 6.5.
The net enterprise value is approximately equal to equity times 2.5. For a more accurate 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 company value calculated with other methods. Nevertheless, the factors available on the market are always as imprecise as a company is not arbitrarily comparable. This must be taken into account.
The venture capital method
The venture capital method can be used to value start-ups. The value of these companies lies in the development of new concepts and technologies, not in assets, sales or positive cash flows. Therefore, the previous valuation methods 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 company value is then discounted over the assumed duration. However, a higher discount rate is used than for established companies, because the risk is much higher.
Company valuation according to the principles of the IDW
Multipliers customary in the industry are not sufficient here, 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.
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According to the Institute for SME Research, each year in Germany more than 20,000 SME companies are left 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 valuation of the company. Since the methodologies for valuation are analogous to those used for large companies, the question arises whether there are not a few small but crucial differences in the valuation of SMEs.
However, the differentiation from large companies is not only based on key figures and financial parameters. This means that SMEs have a few very specific characteristics that fit well into 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. Added to this are the strong influences of the owners and the lack of diversification. Simplified processes such as accounting or the lack of documentation for corporate planning also bring the crucial differences to light.
Against this background, the question naturally arises all the more whether the business valuation of SMEs must/should not be fundamentally different.
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. This means, for example, comparing observable prices or returns for similar assets. But it is precisely in this point that a valuation differs from large companies. Not in the methodology, but in the complexity.
Of course, a group valuation is highly complex and anything but trivial. A valuation of an SME is in no way inferior in terms of complexity tobecause there is a lack of comparable values here. 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, SMEs often have the suitable solution of a succession situation as a valuation occasion.
Within this framework, it goes without saying that a sound analysis and the specific circumstances of the SME are taken into account. The focus here is on determining the future achievable turnover (taking into account the new or old owners) and a suitable, risk-equivalent capitalisation interest 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 value generators leads to false dependencies (e.g. depreciation, interest and dividends do not directly depend on turnover)
The following factors are neglected in the discounting:
- Different risk-free interest rates for longer and shorter periods
- Distinction between secure and uncertain cash flows and their correct discount rate
- 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