There are many different methods for the company sale valuation. But which is the right one?
There is the valuation according to a rule of thumb or also the valuation according to the multiplier method and the discounted cash flow method. However, we would like to look at the Earnings value-oriented company valuation for the sale of a company take a closer look and see why it can be particularly attractive, because it is carried out for many business successions. Whether for the determination of the business share in the estate, for tax calculation or for the preparation of a company sale: Business valuations based on capitalised earnings value are sometimes not only absolutely necessary, but also provide reliable information on the value of the company for both buyer and seller.
Five reasons why the company sale valuation according to the capitalised earnings method is worthwhile:
1. they provide clarity ? because enterprise value is not the same as purchase price
Can you give a concrete answer to the question about the enterprise value of your company? If so, congratulations on your comfortable position. In our daily work as M&A advisors, we often experience the opposite. Only a few entrepreneurs answer with an amount, which then often turns out to be a sales price expectation. Even seasoned company owners become uncertain when answering this question. The most common answer is: ‘The sum of all assets plus X amount’.
On the other hand, however, for most corporate buyers the only thing that determines their decision is the future transferable income value the value of a company. The purchase price itself represents the real value of the company in very few cases, but reflects the value that a buyer wants to pay at the moment of transfer of ownership.
2. multiplier method completes capitalised earnings method
Family-run SMEs often resort to so-called multiples when determining the value of a company. In this method, the enterprise value is derived from prices paid in transactions of comparable companies in an industry with a turnover of 50 million euros or more. It is assumed that conclusions can be drawn about the value of the company in question from observable market prices of comparable companies.
For a initial assessment this approach helps. We at KERN company succession have with the free online Company value calculator developed our own tool that helps you to understand the Calculate enterprise value and which provides you with an initial orientation.
However, both procedures do not replace an individually created Business valuation. The multiplier method is often used for the valuation of much larger and more transparent companies. Moreover, it rarely takes into account changes in the environment, special and one-off effects and expectations that influence the value of the company.
Assessment procedures are snapshots
The multiplier approach is more of a supplementary method for obtaining indications of the value of a company, but also for making company values plausible on the basis of earnings value-oriented methods. This only applies if the multiples have been carefully selected. Only then are company-specific differences, such as different profitability or financing structures, captured as fully as possible. Consequently, a stringent implementation of the multiplier approach requires a very intensive examination of the valuation object, the comparable companies and the industry.
3. a good company valuation for the sale strengthens the negotiating position
A well prepared Business valuation on the other hand, prepares the entrepreneur’s negotiating position. It informs the seller in detail about the current earning value of his company and the essential current factors influencing the company’s development. As a result, he is ideally prepared for later negotiations. At the same time, it is a solid and important basis for subsequent Due Diligence or financing discussions of the acquirer.
In practice, the capitalised earnings value method according to the IDW S 1 standard (Institute of Public Auditors in Germany) and the discounted cash flow method (DCF method) have become the two methods of calculating the capitalised earnings value. Calculate enterprise value established. The income capitalisation approach, which is widely used in German-speaking countries, is, like the DCF method, equally accepted by the authorities, banks, tax advisors, etc. Furthermore, the discounted cash flow method is also a Internationally accepted standard.
4. realistic plans for the future provide argumentation aids
The multiplier method is primarily based on the results of the past three years, adjusted for one-off and special effects or tax saving models, when determining the enterprise value. The capitalised earnings value method is primarily based on the expected results in the future and is thus absolutely future-oriented. Past values are used more as a check on planning. As valuation specialists, we recommend that especially the prognosis should be conservativeA sudden increase in turnover or a rapid decrease in costs must be justified in a comprehensible way.
It should be emphasised that the results are not least of a Assessment that is as objective as possible of the company’s future surpluses and a realistic risk assessment. For the majority of family businesses, an individually developed risk assessment is recommended instead of applying the lower risk multiples of listed companies.
5. well-founded company valuation reduces the financial burden on successors
A factually correct business valuation promotes the entrepreneur’s engagement with the future development of his company. When preparing a company valuation, it is important to consult specialised experts, reputable M&A advisor is advisable. By critically examining the information provided, the external specialists ensure that a company valuation can be turned into a Purchase price expectation enforceable on the market is derivable. At the same time, a well-founded company sale valuation allows the Company sale prepare optimally.
Furthermore, the tax office usually accepts a conclusive valuation report as an alternative to the one in the §199 of the Valuation Act (BewG) defined procedures. As a result, this often leads to a lower tax burden or lower settlement sums vis-à-vis co-heirs. The financial burden on the companies to be transferred is reduced.
Image: Pixabay/athree23
TIPS for further reading:
What increases the value of the company?
Determine the company value online free of charge
Hard & soft factors in business valuation
3 reasons why inflated company valuations prevent successions
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