Basically, the valuation of a small company works the same way as that of a large one. In general, it is less complex. But there are a few things that make the evaluation difficult and that you need to know.
Why is the assessment less complex?
Size and diversification: small companies have fewer business units, subsidiaries and geographic markets in which they operate. There is less to consider, which reduces complexity.
Capital structure: While large companies typically have a more complex capital structure with various types of debt and equity, including preferred stock, convertible bonds and other financial instruments, the capital structure in a small company is much simpler. The assessment does not have to take into account the effects of different forms of financing.
Lack of availability of financial information
Depending on how the disclosure requirement is regulated in the country, smaller companies also have to publish their business results, depending on their legal form. Basically, however, there is significantly less information publicly available for small companies. Large companies often receive additional extensive reporting from financial analysts who can support a valuation. Small companies have less or no such reporting.
How easy is it to sell a share?
Large companies’ stocks tend to be more liquid and easier to trade, making it easier to determine their market value. Shares in small companies, especially minority shares, are difficult to trade, which makes the valuation more complex.
What are small companies more vulnerable to risk?
Small companies are more vulnerable to market fluctuations, competitive pressures and management errors than large companies. This makes them more vulnerable to risk. This must be taken into account in the evaluation.
What about transferability to a successor and management quality?
How dependent is the company on the owner? A large dependency has a negative impact on the rating. The quality of management also has a greater influence on company value in small companies. The skill and experience of the company management are crucial factors, and it must be ensured that the management supports a change of ownership and remains with the company at least for a certain period of time.
Market dynamics and adaptability
When small companies operate in niche markets that change faster and are more volatile than the markets of large companies, this requires a detailed analysis of market dynamics. Does the company have the resources to adapt quickly to changing markets?
Which valuation methods are suitable for small businesses?
Nimbo publishes monthly current multiples for small companies in various industries in numerous countries on its website. This also offers small companies the opportunity to value their company using the market value method. Other common valuation methods for small businesses are the earnings value method or the net asset value method.
Do you need further information?
Is this topic relevant to you? The Nimbo Guide provides you with more detailed information.
