Calculate business value


The complete guide for entrepreneurs

On this page: Here we present everything you need to know about calculating company value that is interesting from an entrepreneur’s point of view. We are continuously expanding the site. What does the current market environment look like? What good are online company value calculators? 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 current online company valuation for a valuation based on current market data and individual value drivers. In addition, we publish the current valuation multiples 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 .

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4 things you need to know before calculating the company value


A company 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. Apparently neutral numbers, “hard facts” and calculations based on academic models are used. However, these are based on assumptions about an uncertain future. Each assessment method gives you the tools you need to consistently quantify your assumptions and opinions. However, there is always a subjective story behind it, influenced by the author of the review.

The valuation will reflect what one already believes about the company

Most people who are concerned with valuing a company already have an idea of what they think a company is worth. This preconceived notion will find a way into the evaluation. Be it through the choice of the valuation method, the assumptions for future growth or the selection of the companies to be compared. The valuation will reflect what the creator already believes about the company. Therefore, be aware of your own bias and when considering a company review, always ask: Who prepared or paid for this review and what is the bias and motives behind it?

More complicated doesn’t mean better

Beware of apparent accuracy when calculating company value! The more complicated a valuation model, the more ways the author will find, consciously or unconsciously, to reflect his bias in the valuation. If you can’t explain your company valuation to someone else in a simple way, you haven’t understood it yourself.

Think in terms of bandwidths and scenarios

Whenever possible, use at least two methods of business valuation and look at the business value from multiple angles . Try to understand why different valuation methods produce different results. Investigate how changing assumptions and forecasts changes valuation outcomes. This gives you a feeling for the possible range of company value and what this depends on.

Determining company value: 3 approaches


All common company valuation methods are based on one of the following approaches. Each approach looks at the value of the company from a different angle.

Market-oriented approach: At what prices were similar companies sold?

The company’s value is what buyers would pay for it. You look for published selling prices from companies in the same industry, of similar size and in the same country. The associated valuation method is called the 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 is the discounted cash flow method , the simplified earnings value 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 its parts. All machines, furniture, inventories, patents, real estate, securities, etc. are valued. Debts are deducted. This approach is called the net asset value method .

You can find out which valuation method is right for your company in the next section.

Which business valuation method is best suited for YOUR situation?


Not every valuation method is suitable for all companies. The figure below shows a decision tree that will help you to choose the right valuation method. If possible, use several valuation methods to get a range of possible company values.

The multiple method and the simplified earnings method are suitable for stable and profitable companies. Your advantage is that you are simpler and easier to understand (eg compared to the discounted cash flow method), you can make do with fewer assumptions and you don’t need a detailed profit forecast for the coming years. They are based on the current situation of the company. However, they cannot take future developments into account.

The discounted cash flow method (DCF) is very flexible and can basically be used in any situation. However, the method is based on many assumptions and forecasts for several years have to be made. Small changes can mean large fluctuations in the valuation result. The scoring model can also give a false impression of accuracy. In the case of stable companies, the method can at best be used as a supplement to simpler methods.

The net asset value method only considers the current assets of a company. In the case of a profitable company, the net asset value is significantly lower than the valuation result of other methods. If this were not the case, it would mean that selling the company’s individual assets (and thus winding up the company) would make sense. The advantage of the net asset value method is that it is comparatively simple and "objective". The intrinsic value can be seen as the lower limit of the company value. In certain countries, the valuation by the tax authority is based at least in part on this valuation method.

The venture capital method is widely used in practice for evaluating start-ups. It is an adaptation of the discounted cash flow method.

An overview of the individual valuation methods


Please also read our more detailed overview of the common valuation methods .

Multiplier method: What does the market pay for similar companies?

Current prices from comparable companies are used for the valuation. The sales price is viewed as a multiple (“multiplier”) 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 liabilities (so-called "enterprise value"). Debt is deducted for the value of equity. The challenge with this method is the availability of data. Purchase prices of small and medium-sized companies are only rarely published. A comparison with companies listed on the stock exchange is useless, since 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 earnings value method: Sustainable earnings discounted in line with the risk

The formula for this valuation method is: enterprise value = earnings divided by the discount rate. The capitalization interest rate shows that this income is only in the future and is 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 major impact on the calculated company value. This earned value method is called "simple" because it only assumes an adjusted sustainable profit. A detailed future development of earnings is refrained from. Of course, only profitable companies lead to positive reviews. Valuing unprofitable companies using this method is pointless. Here you will find more detailed information on the simple earnings value method , including a sample calculation .

Discounted cash flow method (DCF): The flexible earnings value method

This valuation method is closely related to the simple earned value method described above. The interest rate is applied individually to future cash flows ("free cash flows") for the next 5 years. For the time after that, the so-called residual value is added. This is very similar to the simple earnings value described above. The sum of these discounted cash flows and the residual value of the company gives the company value. This valuation method is very flexible and, from a theoretical point of view, "best practice". However, it is even more subjective and sensitive than the earned value method. Never trust a DCF valuation that you have not whitewashed yourself. You can find more information about the discounted cash flow method here.

Net asset value method: Calculating company 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. This includes balance sheet items of a tangible and intangible nature. Taxes, debts and liabilities are deducted. Hidden reserves are liquidated. So what is objectively available is soberly evaluated. 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 sales price is lower than the asset value, it would make sense for the entrepreneur to simply liquidate the company. Therefore, the asset value serves as the lower limit for the company value. The net asset value method is also used when other methods lead to negative valuations. You can find a more detailed description of the net asset value method , including a calculation example, here.

Method mix and mean value methods

Each method has strengths and weaknesses. It is therefore advisable not to rely on just one method. A mix of different methods, run through several times with varying scenarios, gives a feeling for the possible bandwidth of the company’s value. With the averaging methods, a weighted average of the simplified earnings value and the net asset value is often taken. These include, for example, the Berlin method , the Vienna method , the surplus method and the Swiss or the practitioner method . The so-called Stuttgart procedure was abolished in 2009.

assessment standards

Court-proof standards have been established for inheritance and family law disputes.

IDW S1 procedure

In Germany, the IDW S1 procedure was developed by the Institute of Public Accountants (IDW). It defines basic concepts of how individual valuation methods are to be applied. In most cases, the defined principles are applied to the discounted earnings method. However, they can also be transferred to other methods. The IDW S1 method differs from the simplified earnings value method in many ways and is more complicated to use. For example, a planning calculation is required for the next 3 years and the discount factor has to be calculated individually from several factors.

The AWH procedure for the valuation of handicraft companies

This procedure was developed by the working group of value-determining consultants in the trade. It is based on the earned 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 businesses.

Current market environment February 2024


Since the low point at the end of 2020, the current market environment for the sale of companies after Corona has recovered significantly. Depending on the size of the company, country and industry, the prices achieved were again close to or even above the pre-crisis level. However, since the war in Ukraine and the rising inflation rate, prices have fallen again a little. Our market data on sales, EBIT and EBITDA multiples for individual countries and sectors can be found on our multiples page .

The top factors for company value


Supply & Demand

There is no objective company value when you want to sell a company. In the event of a sale, supply and demand determine the value of the company.

financial figures

Companies are valued based on their expected future returns. An analysis of past and present returns gives an indication of a possible future development. The returns are checked for sustainability. Extraordinary gains and losses are deducted. In which direction are the sales and returns trending? Can bad years be explained?

Trust in the seller and his documents

The greater the risks, the lower the company value. There must be no doubts about the correctness and completeness of information. This increases the uncertainty on the buyer’s side unnecessarily. It is important to prepare all documents accordingly. These should show a transparent and error-free image of the company. Bad surprises must be avoided at all costs.

Dependence of the company on the owner

For an investor, a high dependency on the owner is a risk. How does the company continue if the current owner is no longer there? When his experience, his knowledge and his relationships with customers and suppliers can no longer be used?

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 difficult to duplicate.

risks

A balanced customer base, replaceable business partners and low dependency on individual employees reduce the risk.

growth prospects

Is the business model geared towards growth? What are the odds for a potential buyer? Are there attractive economies of scale?

staff

How high is the employee turnover? What is the sickness rate? What is the age structure? How sought-after are employees on the job market?

Calculate the 5 most common mistakes in company value


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 this price? Couldn’t you set up a new company with this amount? How long would it take for a buyer to refinance the sale price in the form of profits? Tip: Nobody wants to be in the red 8 years after buying the company.

No market wage for the owner

A win is only really a win if all employees – and that includes the managing director! – were remunerated in line with the market. Everything else is a distortion of the earnings situation, which leads to an overvaluation.

Orientation towards large companies

The market leader in your industry is valued at three times the sales? Amazon was already worth billions before it even turned a profit. The EBIT multiples of listed companies are often in double digits. However, for companies with a turnover of less than 20 million, EBIT or EBITDA multiples between 3-6 are the norm. 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 specific purchase offers.

“Full warehouse” and “Great machinery”

Most valuation methods are based on the earnings of the company. 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 is already taken into account. This includes machinery, warehouses, innovative products, etc. If these things do not ensure higher profits in the future, they are worthless from this point of view. However, many owners would like to add the warehouse to the earnings value of the company, for example. This is not appropriate with these methods.

“The company has a lot of potential”

Almost every company “still has a lot of potential”. Capitalizing on this requires a great deal of entrepreneurial spirit and resources and should therefore only be factored into the valuation cautiously. If you want to tap the full potential of the company, you should do it yourself and only sell the company later. No one believes a seller that the company is about to make a big leap in profits. Then why would he want to sell at this precise moment?

Calculate COMPANY VALUATION: expiration


1) Cleaning of accounting documents: the annual accounts for the last 3-5 years are normalized. Extraordinary expenses and income, non-essential expenses, hidden reserves and tax optimization are deducted. Entanglements with the owner’s private life are resolved. If necessary, salaries are adjusted by the owner or other related persons who are not in line with the market. The resulting financial figures should reflect the sustainable earnings situation of the company as precisely as possible, which is also realistic under new ownership.

2) Creating budget figures for the next 3-5 years (best for different scenarios).

3) Valuation using the various popular valuation methods, taking into account the previous points.

4) Mix of the individual methods for forming mean values and ranges, also taking into account different scenarios and assumptions.

Calculate company value rule of thumb


Company 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 company valuation formula?

  • Calculating enterprise value Rule of thumb 1: Calculate the average 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 company debt from the results. You will receive a range in which your company’s value will roughly range.
  • Calculating enterprise value Rule of thumb 2: Consider how much profit a buyer could take out of the company over the next few years. Set the price so that it can amortize 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 first indication of a possible selling price. For a definitive price determination, however, a technical expert should always be consulted.

Characteristics of a good online company valuation

  • Systematic guidance through a structured questionnaire
  • Understandable for laypeople
  • Financial figures can be cleaned up
  • Calculation of enterprise value based on current market data
  • Considers different industries
  • Takes different company sizes into account (a company with 5 employees is valued differently than one with 50 employees)

Online company reviews are NOT suitable…

  • … for evaluating startups
  • … calculate the value of a company that is growing very quickly
  • … 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 will receive an automatic evaluation after the questionnaire. At the end comes the surprise: You have to enter your contact details and a “technical expert” (salesperson) will answer by phone.

Maximize company value in the short term (so called “window dressing”)


There are a number of things that can be done before the sale to reduce uncertainty and highlight the company’s strengths. This maximizes selling price.

Distributing knowledge, documenting processes, defining substitutes

This minimizes the possible damage if an important employee is absent or leaves the company. This alleviates a major concern of a potential buyer.

Ensure customer and supplier relationships

A buyer will worry about losing important customer or supplier relationships after the owner leaves.

  • Transfer important relationships to employees who are likely to remain with the company.
  • If possible, secure customer relationships through service level agreements and loyalty programs.
  • Identification of alternatives for key suppliers to mitigate the risk of defaults and price increases.

Optimization of receivables management

Reduce the capital tied up in current assets. This directly increases the value of the company. Shorter payment terms for customers and a consistent dunning process should be checked.

Prepare annual accounts

The annual financial statements for the last 5 years must be transparent and easy to understand. Fluctuations in turnover, slumps in profits, noticeable jumps in costs, etc. must be conclusively explainable on request. This creates trust and increases planning security.

Document well-known references

Get references from well-known and satisfied customers and include them in the sales documents.

Convincing formulation of the market advantages

What makes the products or services unique in the market? What is difficult for the competition to copy? Focus on what is important and get to the point. Attach the formulated benefits to the sales documents.

Create a plausible growth plan

Identify realistic and concrete potential for further growth and increased efficiency and show specifically how this can be realised. Also, be prepared to ask why you haven’t already implemented it yourself.

Anticipate and prepare for further information needs of the buyer

The greater the buyer’s uncertainties and doubts, the lower the purchase price. Build trust with well-documented, clear, complete answers to anticipated questions.

Clarify unregulated employee claims

Clarify and document all claims for bonuses, holidays, promised wage increases, etc. Negative surprises for the seller are to be avoided.

Secure business premises

Increase planning security by securing long-term tenancies for your premises, if necessary with renegotiations with the landlord.

Resolve internal conflicts

Quarrels should be clarified and a bad mood in the team should be improved. The sales process and the transition phase are demanding and the owner depends on the support of the employees.

Prepare business premises

The eye rated:

  • cleaning of the premises
  • Implementation of due renovations
  • Ensure compliance with legal requirements
  • Sale or disposal of superfluous machines and inventory
  • Cleanup of warehouse

Update the company website

Avoid an outdated or unprofessional website.

Evaluate startups


Evaluating startups is even more subjective than evaluating established companies. Only a promise for the future is evaluated.

Key Terms: Pre-Money vs Post-Money Rating

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 that it is clear when valuing whether you are talking about a “pre-money” valuation (value before the financing round) or a “post-money” valuation (value after the financing round).

Expected returns 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 rate of return is needed for the DCF and VC methods.

funding phaseExpected rate of return / discount rateExpected 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-Company Valuation_2012.pdf, slide 29

Discounted cash flow method for startups (DCF)

The DCF method described above can be applied to startup business plans. 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. You use the simple multiplier method . This is actually only suitable for established, profitable companies. If the company is not yet making a profit, there is nothing to multiply. Therefore, as a first step, you imagine that everything is going exactly as in the business plan. The multiplier method is then applied to the projected numbers in, for example, 5 years from now. This then results in the hoped-for value in 5 years. It is of course very uncertain whether this scenario will actually occur. The future value is therefore calculated back to the present using the return expectations of the investors (see table above).

Example: A startup (first stage) expects an 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. Investors expect an annual return of 40%. The value of the company must therefore increase by 40% every year. It must be calculated back using the following calculation: 6.0 million / (1 + 40%) ^ 5 = 1.1 million. The company thus receives a post-money valuation of 1.1 million.

Glossary: Important terms in business valuation


DCF

Stands for “Discounted Cash Flow”. The DCF method is a frequently used valuation method.

Derivative business value

Derivative business value is the difference between the actual purchase price of a company and its intrinsic value. The value is reflected in the accounting of a company that has bought another company. From an accounting point of view, it corresponds to “goodwill” and “business value”. If the value does not come about through a purchase price, but is estimated, one speaks of “original business value”.

enterprise value

The overall value of the company from the perspective of equity and debt investors. In contrast to the equity value, the borrowed capital is not deducted. The value allows a comparison between companies with different capital structures.

equity value

The value from the point of view of the equity providers. Equity value equals enterprise value minus debt plus cash reserves.

Business value

In practice, this value is often equated with the total value of the company. From an accounting point of view, “business value” only refers to the part that goes beyond the net asset value (see “net asset value”) in the event of a sale. Equivalent to “goodwill” and “derivative business value”.

goodwill

See “Derivative business value”.

Intangible assets

Intangible assets are assets that appear on a company’s balance sheet but are not physically tangible. This includes, for example, patents, trademarks and licenses. The sum forms the intangible value of the company.

material value

Physically tangible assets such as machines and inventories.

original business value

The original business value is the difference between the self-estimated total business value and the asset value. It cannot be reflected in the accounting. In contrast to derivative business value, the value is not derived from an actual sales price but is an estimate. Therefore, it cannot be accounted for.

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 poured into the company.

intrinsic value

See net asset value method .

Frequently Asked Questions


What makes a good valuation tool?

It should be well structured, easy to understand and understandable, take different sectors and company sizes into account and be based on current market data.

Are online company reviews suitable for everyone?

Unless expressly stated otherwise, they are NOT suitable for initial indication of startups, fast-growing companies and companies that are making a loss or are only marginally profitable.

Calculating the value of a company: which is the best method?

Each method has strengths and weaknesses. Don’t rely on just one method. A mix of different methods, run through several times with varying scenarios, gives a feeling for the possible bandwidth of the company’s value. 

Can I calculate the enterprise value with a rule of thumb?

Calculating enterprise value Rule of thumb 1. Multiply the average EBIT of the last three years by four and then by six. Subtract company debt from the results. You will receive a range in which your company's value will roughly range.

Calculating enterprise value Rule of thumb 2: Consider how much profit a buyer could take out of the company over the next few years. Set the price so that it can amortize the purchase price within 4 to 7 years.

How do you deal with real estate when determining the company value?

If you want to calculate the value of a company that owns real estate, these are usually valued separately and then added up. When a property is sold, it is often the case that the properties are first spun off and then rented out to the buyer. In this case, the company’s historical financial figures are adjusted by subtracting a hypothetical market rent. On the other hand, expenses for the maintenance of the property can be added to the profit.