Business Valuation
The complete guide for entrepreneurs
On this page: Here we present everything worth knowing about how to calculate business valuation that is interesting from an entrepreneur’s point of view. We are continuously expanding the site. What does the current market environment look like? Are online business valuation calculators any good? Which valuation method is right for my company? What mistakes should I avoid? Here you will find all this and much more.
Related topics: Use our up-to-date online business valuation for a valuation based on current market data and individual value drivers. In addition, we publish the current valuation for many countries and industries every month. On our site you will also find a detailed description of the most common business valuation methods and a guide to selling a business.
Online business valuation, free and without registration, instant evaluation, 13 page report, algorithm based on thousands of valuation
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4 Things You Need to Know Before Calculating the Value of the Company
A business valuation is not a science, but the telling of a story
Calculating the value of a company is not a science and is not objective. Although one uses seemingly neutral figures, “hard facts” and makes calculations based on academic models. However, these are based on assumptions about an uncertain future. The individual valuationgive you the tools you need to put your assumptions and opinions into numbers in a consistent way. However, there is always a subjective story behind it, influenced by the author of the valuation.
The valuation will reflect what is already believe about the company
Most people involved in valuation a business already have an idea of what they think a business is worth. This preconceived opinion will find a way into the valuation. Be it through the choice of valuation, the assumptions for future growth or the selection of companies to compare with. The valuation will reflect what the creator already believes about the company. Therefore, be aware of your own biases and when considering a company valuation, always ask: Who created or paid for this valuation and what biases and motives are involved?
More complicated does not mean better
Beware of bogus accuracy when calculating company value! The more complicated an valuation, the more ways the author will consciously or unconsciously find to reflect his bias in the valuation. If you can’t explain your business valuation someone else in a simple way, you haven’t understood it yourself.
Think in terms of bandwidths and scenarios
If possible, use at least two methods for the business valuation and look at the company value from several angles. Try to understand why different valuationproduce different results. Examine how changing assumptions and forecasts changes valuation. This will give you a sense of the possible range of enterprise value and what it depends on.
Determining company value: 3 approaches
All common business valuation methods are based on one of the following approaches each. Each approach looks at the value of the business from a different angle.
Market-oriented approach: At what prices were similar companies sold?
The value of the company is as much as buyers would pay for it. One searches for published sales prices of companies in the same industry, with similar company size and in the same country. The associated valuation method is called Multiplier method (or “market value method”, “comparative value method”).
Profit-oriented approach: How much profit will the company generate in the future?
The value of the company is the sum of all future profits or cash flows. The further in the future and the more risky, the more the individual profits are “discounted”. There are the Discounted cash flow method , the Simplified capitalized earnings method and the Venture Capital Method (for startups).
Cost-based approach: What is the value of all individual parts?
The value of the company is the sum of all individual parts. All machinery, movables, inventories, patents, real estate, securities, etc. are valued. Debts are deducted. This approach is called Substance value method called.
You will learn which valuationis right for your company in the next section.
Which business valuation method is best suited for YOUR situation?
Not every valuationis suitable for all companies. The figure below shows a decision tree which helps you to choose the right valuation. Use multiple valuation, if possible, to obtain a range of possible business values.
The Multiplier method and the Simplified capitalized earnings method are suitable for stable and profitable companies. Its advantage is that it is simpler and easier to understand (e.g. compared to the discounted cash flow method), requires fewer assumptions and does not require a detailed profit forecast for future years. They are based on the current situation of the company. However, they cannot therefore take into account developments in the future.
The Discounted cash flow method (DCF) is very flexible and can basically be applied in any situation. However, the method is based on many assumptions and forecasts must be made for several years. Small changes can mean large fluctuations in the valuation The valuationcan also feign inaccuracy. For stable companies, the method can at best be used as a supplement to simpler methods.
The Substance value method considers only the current assets of a company. For a profitable company, the net asset value is significantly lower than the valuationother methods. If this were not the case, it would mean that the sale of the individual assets of the company (and thus the dissolution of the company) would make sense. The advantage of the net asset value method is that it is comparatively simple and “objective”. The net asset value can be regarded as the lower limit of the business value. In certain countries, the valuation by the tax authority is based at least in part on this valuation.
The Venture Capital Method is widely used in practice for the valuation startups. It is an adaptation of the discounted cash flow method.
Overview of the important business valuation methods
Please also read our more detailed overview of the common valuation.
Multiplier method: What does the market pay for similar companies?
The valuation is based on current prices achieved by comparable companies. The selling price is considered to be a multiple of a basic key figure, such as EBIT, EBITDA or sales.
The determined value of the company corresponds to the value of the equity plus the financial debts (so-called “enterprise value”). For the value of equity, debts are deducted. The challenge with this method is the availability of data. Purchase prices of small and medium-sized companies are rarely published. A comparison with listed companies is useless, as much lower multiples are usually paid for smaller companies. Every month, NIMBO publishes the currently observed EBIT, EBITDA, EBITC and sales multiples for various countries, company sizes and industries. Please also read the detailed explanation of the individual multiples including a detailed example.
Simple capitalised earnings value method: sustainable earnings discounted in line with risk
The formula for this valuation method is: business value = revenue divided by capitalization rate. The capitalization rate represents that these earnings are only in the future and are subject to risk. The level of this assumed interest rate is subjective. For smaller companies, it is in the 10-20% range. Small changes in the interest rate have a large effect on the calculated business value. This capitalised earnings value method is referred to as “simple” because only an adjusted sustainable profit is assumed. One refrains from a detailed future earnings development. Of course, only profitable companies lead to positive ratings. Valuing unprofitable companies using this method is pointless. Here you will find more detailed information on the simple capitalised earnings value method including a calculation example.
Discounted Cash Flow Method (DCF): The Flexible Capitalised Earnings Value Method
This valuation method is closely related to the simple capitalised earnings value method described above. The interest rate is applied individually to the future cash flows (“free cash flows”) for the next 5 years. For the time thereafter, the so-called residual value is added. This is very similar to the simple income value described above. The sum of these discounted cash flows and the residual value of the company results in the enterprise value. This evaluation method is very flexible and, from a theoretical point of view, “best practice”. However, it is even more subjective and sensitive than the capitalized earnings method. Never trust a DCF valuation that you haven’t glossed over yourself. Here you can find more information about the discounted cash flow method.
Net asset value method: Calculation of business value as the sum of assets
The net asset value is obtained by first adding the values for fixed and current assets at market prices. These include balance sheet items of a tangible and intangible nature. Taxes, debts and liabilities are deducted. Hidden reserves are released. Thus, what is objectively available is evaluated. However, a buyer is usually not only interested in the substance of the company. He would like to know what profit can be generated with this substance in the future. Therefore, this valuation method is only used in combination with other methods. If the selling price is lower than the net asset value, it would make sense for the entrepreneur to simply liquidate the company. Therefore, the net asset value serves as a lower limit for the business value. The net asset value method is also used when other methods lead to negative evaluations. You will find a more detailed description of the net asset value method including a calculation example here.
Mix of methods and averaging methods
The individual methods have strengths and weaknesses. It is therefore advisable not to rely on just one method. A mix of different methods, run several times with varying scenarios, gives a feel for the possible range of company value. With the average value methods, a weighted mean value is often taken from the simplified capitalised earnings value and the net asset value. These include, for example, the Berlin method, the Vienna method, the excess profit method and the Swiss or practitioner method. The so-called Stuttgart procedure was abolished in 2009.
Valuation standards
Court-established standards have been established for inheritance and family law disputes.
IDW S1 procedure
In Germany, the IDW S1 procedure was developed by the Institut der Wirtschaftsprüfer (IDW). It defines basic concepts on how to apply individual valuation methods. In most cases, the defined principles are applied to the capitalized earnings value method. However, they can also be transferred to other methods. The IDW S1 method differs from the simplified income capitalization approach in many respects and is more complicated to apply. For example, a plan calculation for the next 3 years is required and the discount factor must be calculated individually from several factors.
The AWH method for the valuation of craft enterprises
This procedure was developed by the working group of the value determining advisors in the handicraft. It is based on the capitalised earnings value method. The basic principles are strongly based on the IDW S1 procedure. These are adapted if they are difficult to implement for small and medium-sized craft enterprises.
Current market environment March 2023
Since bottoming out in late 2020, the current market environment for corporate sales to Corona has rebounded significantly. Depending on company size, country and industry, the prices achieved were again close to or even above pre-crisis levels. However, since the war in Ukraine and the rising inflation rate, prices have fallen again somewhat. Our market data on revenue, EBIT and EBITDA multiples for individual countries and industries can be found on our multiple page.
The top factors for company value
Supply & Demand
There is no objective business value when you want to sell a business. The company value is determined by supply and demand in the event of a sale.
Key financial figures
Companies are valued on the basis of their expected future return. An analysis of past and present returns provides an indication of possible future developments. The returns are reviewed for sustainability. Extraordinary gains and losses are eliminated. In which direction is the trend in sales and returns pointing? Can bad years be explained?
Trust in the seller and his documents
The greater the risks, the lower the value of the company. There must be no doubt as to the accuracy and completeness of any information provided. This unnecessarily increases uncertainty. It is important to prepare all documents accordingly. These are intended to present a transparent and error-free picture of the company. Bad surprises must be avoided at all costs.
Dependence of the company on the owner
For an investor, high dependence on the owner is a risk. How does the company run if one day the current owner is no longer there? When all his experience, knowledge and relationships with customers, suppliers are no longer there?
Market position of the company
How replaceable is the company for its customers? Is an interesting niche being filled? Are there sustainable competitive advantages? A clear focus, an excellent reputation and long-standing customer relationships are hard to copy.
Risks
A balanced customer base, replaceable business partners and low dependence on individual employees reduce the risk.
Growth prospects
Is the business model geared towards growth? What are the opportunities for a potential buyer? Are there attractive economies of scale?
Staff
What is the employee turnover rate? What’s the sick rate? What is the age structure? How sought after are the employees on the labour market?
The 5 most common mistakes when calculating the value of a company
Bias
Company owners understandably find it difficult to look at their own company objectively. Price expectations are often too high. So ask yourself: would you buy the company yourself at that price? Couldn’t you build a new company with that amount of money? How long would it take for a buyer to refinance the sale price in the form of profits? Tip: No one wants to be in the red 8 years after buying a company.
No market wage for the owner
A profit is only really a profit if all employees – and that includes the CEO! – were paid in line with the market. Anything else is a distortion of the earnings situation, which leads to an excessively high valuation.
Orientation towards large companies
The market leader in your industry is valued at three times sales? Amazon was worth billions before it even turned a profit. The EBIT multiples of listed companies are often in double digits. For companies with less than 20 million in sales, however, EBIT or EBITDA multiples between 3-6 are the rule. In our overview you will find realistic valuation multiples for a company of your size and your industry. Is your company the rare exception? Then you will notice this through regular, unsolicited and concrete offers to buy.
“Full warehouse” and “Great machinery”
Most valuation methods are based on the firm’s earnings. The company is seen as an instrument for generating future profits. Everything that is needed to be able to generate these profits in the future has already been taken into account. This includes machinery, warehouse, innovative products, etc.. If these things do not provide a higher profit in the future, they are worthless from this point of view. However, many owners would like to add, for example, the stock of goods to the income value of the company. That is not appropriate with these methods.
“The company has a lot of potential”
Almost every company has “still a lot of potential”. Taking advantage of this requires a lot of entrepreneurial spirit and resources and should therefore be cautiously factored into the valuation. If you want to exploit the full potential of the company, you should do this yourself and only sell the company later. No one believes a salesperson that the company is about to take a big leap in profits. So why would he want to sell at this exact time?
Calculate COMPANY VALUATION: Procedure
1) Cleaning up the accounting records: the financial statements of the last 3-5 years are normalized. Extraordinary income and expenses, non-operating expenses, hidden reserves and tax optimizations are eliminated. Entanglements with the private life of the owner are resolved. If necessary, salaries from the owner or other related parties that are not in line with the market are adjusted. The resulting financial figures should reflect as accurately as possible the sustainable earnings position of the company, which is also realistic under new ownership.
2) Create projected numbers for the next 3-5 years (preferably for different scenarios).
3) Evaluation using the various common evaluation methods, taking into account the previous points.
5) Mix of the individual methods for the formation of average values and ranges, also taking into account different scenarios and assumptions.
Rule of thumb business valuation formula
Business valuation formula for a first indication
You just want an indication of the company value of a small or medium sized company based on a rough business valuation formula?
- Calculate company value Rule of thumb 1: Calculate the average of the EBIT (earnings before interest and taxes) of the last three years. Multiply this by a factor of 4 (low value) to 6 (high value). Subtract debts of the company from the results. You will get a range in which your company value is approximately.
- Calculate company value Rule of thumb 2: Consider the amount of profits a buyer could take out of the company over the next few years. Set the price so that it can recoup the purchase price within 4 to 7 years.
Calculate the value of a company with online services
An online company valuation can provide a good initial indication of a possible selling price. However, a specialist should always be consulted for a definitive price determination.
Characteristics of a good online company evaluation
- Systematic guidance through a structured questionnaire
- Understandable for non-experts
- Financial figures can be adjusted
- Calculation of company value based on current market data
- Takes different industries into account
- Takes into account different company sizes (a company with 5 employees is valued differently than one with 50 employees)
Online business valuation, free and without registration, instant evaluation, 13 page report, algorithm based on thousands of valuation
> To the online business valuation <
Online company valuationare NOT suitable for.
- … for the valuation startups
- … calculate the value of a company which is growing very fast
- … calculate the value of a company if it makes a loss or very little profit
Beware of marketing tricks!
Many online calculators have only one goal: to generate leads for company sales. They suggest that you get an automatic evaluation after the questionnaire. At the end comes the surprise: you have to enter your contact details and a “subject matter expert” (salesperson) will get back to you by phone.
Maximize company value in the short term (“make the bride pretty”)
A number of things can be done before the sale to reduce uncertainty and highlight the strengths of the business. This maximizes sales price.
Distribute knowledge, document processes, define deputies
This can minimize the potential damage if a key employee drops out or leaves the company. This alleviates a major concern of a potential buyer.
Ensure customer and supplier relationships
A buyer will be concerned about losing important customer or supplier relationships after the owner leaves.
- Transfer important relationships to employees who are likely to stay with the company.
- If possible, secure customer relationships through service agreements and loyalty programs.
- Identify alternatives for key suppliers to mitigate risk for default and price increases.
Optimization of receivables management
Reduce capital tied up in current assets. This directly increases the value of the company. Shorter payment terms for customers and a consistent dunning system should be examined.
Prepare annual balance sheets
The annual financial statements of the last 5 years must be prepared in a transparent and easily understandable manner. Fluctuations in sales, slumps in profits, conspicuous jumps in costs, etc. must be able to be explained conclusively when asked. This creates trust and increases planning reliability.
Well-known references document
Get references from reputable and satisfied customers and include them in sales materials.
Convincing formulation of market advantages
What makes the products or services unique in the market? What is hard for the competition to copy? Focus on what’s important and get to the point. Include the formulated benefits in the sales documents.
Create a plausible growth plan
Identify realistic and concrete potentials for further growth and increased efficiency and show concretely how these can be realized. Also, be prepared to ask yourself why you haven’t already implemented them yourself.
Anticipate and prepare further information needs of the buyer
The greater the uncertainties and doubts of the buyer, the lower the purchase price. Build trust with well-documented, clear, complete answers to anticipated questions.
Clarify unresolved employee claims
Clarify and document all claims to bonuses, holidays, promised wage increases, etc. Avoid negative surprises for the seller.
secure premises
Increase planning security by securing long-term leases for your premises, renegotiating with the landlord if necessary.
Clarify internal conflicts
Disputes should be resolved and bad moods in the team should be improved. The sales process and the transition phase are demanding and the owner is dependent on the support of the employees.
Prepare the premises
The eye makes a judgment:
- Cleaning of the premises
- Carrying out renovations that are due
- Ensure compliance with legal requirements
- Sale or disposal of redundant machinery and inventory
- destocking
Update the company website
Avoid an outdated or unprofessional web presence.
Rate startups
Valuing startups is even more subjective than valuing established companies. One evaluates exclusively a promise for the future.
Important terms: pre-money vs post-money valuation
When a startup closes a funding round, money flows into the startup’s bank account. The value of the company thus increases by this amount of money. It is therefore important to be clear in a valuation whether one is talking about a “pre-money” valuation (value before the financing round) or “post-money” valuation (value after the financing round).
Expected return from investors for startups
Startups are risky investments. That is why investors expect a high return. The earlier the financing phase, the greater the risk and thus the expected return. The expected return is needed for the DCF and VC methods.
| Financing phase | Expected return / discount rate | Expected payback in 5 years |
|---|---|---|
| 1 Seed Stage (foundation) | 70-90% | 20x |
| 2 Start-up Stage (before market launch) | 50-70% | 10x |
| 3 First Stage (Successful Market Entry) | 40-60% | 8x |
| 4 Second Stage (Expansion) | 35-50% | 6x |
| 5 Later Stage (positive cash flow) | 30-40% | 5x |
Source: Venture Valuation, Lecture_IF-Unternehmensbewertung_2012.pdf, Slide 29
Discounted Cash Flow Method for Startups (DCF)
The DCF method described above can be applied to business plans of startups. The discount rate used is derived from the investors’ expected return (see table above).
Venture Capital Method (VC Method)
This method is simpler than the DCF method. One uses the simple multiplier method. This is really only suitable for established, profitable companies. If the company is not yet making a profit, there is nothing to multiply. That’s why the first step is to imagine that everything is going exactly as in the business plan. The multiplier method is then applied to the projected numbers in, e.g., 5 years. This then gives the hoped-for value in 5 years. Whether this scenario will exactly occur is, of course, very uncertain. The future value is therefore extrapolated back to the present using investors’ expected returns (see table above).
Example: A startup (first stage) expects to exit in 5 years. The expected profit in 5 years is 1 million. According to the multiplier method, the company would then be worth 6 million. The investors expect an annual return of 40%. So the value of the company must increase by 40% every year. It must be calculated back with the following calculation: 6.0 m / (1 + 40%) ^ 5 = 1.1 m. The company thus receives a post-money valuation of 1.1 m.
Glossary: Important terms in business valuation
DCF
Stands for “discounted cash flow”. The DCF method is a frequently used valuation method.
Derivative goodwill
Derivative goodwill is the difference between the actual purchase price of a company and its intrinsic value. The value is reflected in the accounts of a company that has bought another company. It corresponds to “goodwill” and “goodwill” from an accounting perspective. If the value is not derived from a purchase price but is estimated, this is referred to as “original goodwill”.
enterprise value
The total value of the firm from the perspective of equity and debt investors. In contrast to the equity value, debt capital is not deducted. The value allows a comparison between companies with different capital structures.
equity value
The value from the equity investor’s perspective. Equity value equals enterprise value minus debt plus cash reserves.
Company value
In practice, this value is often equated with the total value of the company. From an accounting point of view, “goodwill” refers only to the part that exceeds the net asset value (see “net asset value”) in the event of a sale. Synonymous with “goodwill” and “derivative goodwill”.
Goodwill
See “Derivative goodwill”.
Intangible assets
Intangible assets are assets that are included in a company’s balance sheet but are not physically tangible. These include, for example, patents, trademarks and licenses. The total constitutes the intangible value of the company.
Material value
Physically tangible assets such as machinery and inventory.
Original goodwill
The original goodwill is the difference between the self-assessed total goodwill and the net asset value. It cannot be reflected in accounting. In contrast to derivative goodwill, the value is not derived from an actual sales price but is estimated. It may therefore not be included in the balance sheet.
Pre Money Valuation
Refers to the value of a start up before raising an additional round of funding.
Post Money Valuation
Refers to the value of a start up after new money has been infused into the company.
Substance value
Frequently asked questions
What makes a good company valuation tool?
It should be well-structured, easy to understand and comprehend, take into account different industries and company sizes, and be based on current market data.
Are online company reviews for everyone?
Unless specifically stated otherwise, they are NOT suitable for an initial indication of startups, fast-growing companies, and companies that are loss-making or marginally profitable.
Calculate the value of a company: Which is the best method?
The individual methods have strengths and weaknesses. You should not rely on just one method. A mix of different methods, run several times with varying scenarios, gives a sense of the possible range of company value.
Can I calculate the company value with a rule of thumb business valuation formula?
Rule of thumb business valuation formula 1: Multiply the average EBIT of the last three years once by four and once by six. Subtract debts of the company from the results. You will get a range in which your company value is approximately.
Calculate company value Rule of thumb 2: Consider the amount of profits a buyer could take out of the company over the next few years. Set the price so that it can recoup the purchase price within 4 to 7 years.
How do you deal with real estate when determining the value of a company?
If you want to calculate the value of a company that owns real estate, they are usually valued separately and then added together. Often, when a property is sold, it is first spun off and then leased to the buyer. In this case, the company’s historical financial figures are adjusted by deducting a hypothetical fair market rent. Expenses for the maintenance of the property, on the other hand, can be added to the profit.
