The planning of a company succession, the sale of the company or the departure of a shareholder: The company valuation can become relevant for very different reasons. Basically, the company value is an important criterion when a company is up for succession. The company value provides important guidance at all stages of the succession process: If an entrepreneur knows the company value at an early stage and if it turns out to be lower than desired, he may have sufficient time until the time of the planned sale to take suitable measures to increase the value. If the entrepreneur is weighing up various succession options, the company valuation is an important factor in the decision-making process. For example, in order to clarify whether the sum would be sufficient as retirement provision. Or to ensure fair distribution within the family succession. Or to discuss what tax effects an internal family succession would have. When it comes to a concrete sale, the company valuation is a critical decision-making basis for the negotiation talks.
Which way is the right one for me?
There are many ways to obtain a meaningful and realistic value: Income capitalization approach, discounted cash flow method or the multiples method are examples. The wide range and complexity of valuation methods may seem to some entrepreneurs like a “jungle” of offers in which one can quickly lose the overview. At the same time, perhaps only a rough house number is of interest in the first step, in order to be able to decide at all whether a sale is an option for a succession solution. Or the owner would like to discuss the price in depth in order to be optimally prepared for negotiation talks. So how does the potential seller find the right way to determine the value of his company at a reasonable cost in terms of time and money?
The different valuation methods
As already mentioned, there are very different procedures for determining the value of a company. Some are more complex, others more straightforward. On the one hand, there are classic methods such as the capitalized earnings value method. They are complex and require a lot of analysis and planning to arrive at a result. In this method, yield requirements have to be worked with and many things have to be derived in a complicated way. In the capitalized earnings method, future earnings are discounted to today’s earnings. In financial mathematics, this results in a value that can be taken as the enterprise value.
Another approach is to work with multiples. The basis of the multiples method is sales or EBIT. The abbreviation EBIT stands for “earnings before interest and taxes”. In the multiples method, EBIT is multiplied by a factor that depends on the industry. The multiples, such as Mittelstand multiples, are published by agencies. Actual company sales serve as the basis for the multiplier factor. Here, care must be taken to ensure that the multiples are reputable and that they are suitable for SMEs. This is because many multiples are based on the evaluations of corporate groups and are not suitable for use in the valuation of a medium-sized company. Multiples alone are also not sufficient for a well-founded valuation; they should always be combined with another valuation method.
The life’s work in figures
With all valuation methods, the question arises at the end: Who is willing to pay this value? You can calculate a lot, but in the end, what does the result bring to the entrepreneur on the market? Because no matter how high the company is valued: The entrepreneur must first and foremost find a buyer who is willing to pay this price. Or perhaps a potential buyer has such a strong interest in the company that he would be willing to pay an even higher price. Where and how potential buyers are found is, again, another chapter.
Focused on the individual result
“How much is the company worth?” can never be answered in a generalized way. And all valuation methods lead to statements about tendencies. A realistic assessment results from many individual and industry-dependent factors of the company and reflects the current market situation with supply and demand. The sales price is not least the result of many negotiations between buyer and seller.
Regardless of whether the issue is succession within the family, retirement provision or securing the future of the company, we find the right path in the succession process for our medium-sized clients and accompany them professionally in the sale of the company – including the negotiation talks. We select the valuation method that most efficiently meets the individual requirements and objectives of the company and the entrepreneur. When valuing the company, we combine theory with our extensive practical experience. In this way, the medium-sized company receives a realistic value that is well-founded and fair and is given all the important tools to successfully manage the succession.