The Top 4 company valuation methods for 2026 (with examples)
The four most important methods for calculating company value for small and medium-sized enterprises are the Multiple method, the asset-based approach, the Income Approach, and the DCF method. Here’s what you need to know about each method. Simply explained and with examples.
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The Multiple Method
For an overview of our current market data on valuation multiples.
Valuation = Key Metric Multiplied by the Valuation Multiple
The multiple method (also known as the “multiplier method”) is a method frequently used in the field of mergers and acquisitions. The method allows a quick check of whether an asking price for the sale of a company is realistic and appropriate on both the buyer and seller side.
This is based on the prices currently achieved by comparable companies that have already been sold. One examines for what multiple (“multiple”, “multiplier”) these companies were sold and applies this factor to the company to be valued. Multiples can, for example, be multiples of earnings before interest and taxes (“EBIT multiple”), of earnings before interest, taxes, depreciation, and amortization (EBITDA multiple), or of sales (“Revenue multiple”).
The method is primarily suitable for companies that have been in existence for some time. Here, a multi-year profit trend can be used as a basis for valuation. The better the empirical values, the more meaningful the result will be. In any case, it is advisable to use the multiple method in addition to the plausibility check of a company value that has resulted from another method.
The indicative value of the company determined with the multiple corresponds to the “enterprise value”. This is the value of equity plus financial debt. This means that for the value of the equity, the financial liabilities must be deducted from the calculated enterprise value.
Valuation using the EBIT Multiple Method
When valuing a company using the EBIT Multiple Method, the average net earnings before interest and taxes (“EBIT”) of recent years are multiplied by the EBIT Multiple. Profit before taxes and interest is considered so that the multiples remain comparable for companies with different tax rates and debt structures. For smaller companies with up to 20 million in revenue, the observed range for multiples is mainly between 4 and 10. A multiplier of 6 or higher indicates high attractiveness of the company. Where the company falls within this range depends not only on the figures but also on various “soft factors.”
NIMBO uses EBITC Multiples for company valuation
This is based on EBIT plus total executive compensation (gross salary, employer contributions to social security, car expenses).
In smaller companies, the managing director can determine his own salary within certain limits. The “EBITC” allows a comparison with the profitability of other companies without distortions due to wages above or below the market wage, peculiarities in capital structures and different tax rates. In the EBIT variant, an adjustment of the managing director’s salary is also made; however, NIMBO prefers the EBITC variant because, from an empirical perspective, it can better explain observed purchase offers than the EBIT variant.
Valuation using the EBITDA Multiple Method
In contrast to EBIT, EBITDA (earnings before interest, taxes, depreciation and amortization) does not include depreciation and amortization. For the same EBIT, the EBITDA of an asset-intensive company can be significantly higher than that of a personnel-intensive one.
For capital-intensive companies with a high net asset value (NAV), it makes sense from a buyer’s perspective to work with EBITDA Multiples, as the amount of depreciation allows for a certain leeway, which can distort the result. The phase of the investment cycle in which the company currently finds itself should also always be taken into consideration. Are there any investments to be made?
Valuation with sales multiples
From an investor’s point of view, the potential profit of a company is of particular interest. However, if the current profit is not meaningful, very small or even negative, another ratio, such as sales, should be considered. This may make sense, for example, if the purchaser believes in improving the return on sales with its own existing, more efficient cost structures. The potential buyer takes a greater risk with this method and must believe that the company will make a profit in the future.
A sales multiple valuation can also be used as a supplement or to validate other valuations.
Sales multiples are significantly smaller than EBIT multiples. The observed range is mostly between 0.2 and 2, depending on the industry, profitability, growth prospects and some other factors. For low-growth and unprofitable or barely profitable companies, sales multiples between 0.2-0.6 are realistic. Depending on the revenue, even a 0.1 change in the sales multiple can have a significant impact on the company’s value.
If a valuation is performed using both EBIT and sales multiples, and the sales multiple valuation yields a higher value than the EBIT multiple valuation, this indicates a lower return on sales compared to peer companies.
Advantages and disadvantages of the multiplier method:
Further in-depth information can also be found in our blog post “Market Value Approach for Company Valuation.”
The Asset-Based Approach
Valuation = Net Asset Value (NAV) of the Company
This is the simplest method for determining the net asset value (NAV).
One adds the values for fixed and current assets at market prices from the balance sheet, adjusts them for hidden reserves and deducts taxes, debts and liabilities.
The net asset value (NAV) typically reports a rather low company value.
In the event that the net asset value (NAV) is not remunerated commensurate with risk or the company even incurs losses, the financial company value – without any value-enhancing synergy effects with a potential buyer – is fundamentally equal to the liquidation value.
In the context of a company sale, the net asset value (NAV) primarily has informational value and is generally below the valuation range of the Multiple methods, as it does not reflect goodwill or earnings potential exceeding the minimum return.
Advantages and Disadvantages of this Method
Applying the asset-based approach as a complement, for example, in combination with a more optimistic method such as the Income Approach (see section on average value methods), can certainly be sensible.
It quantifies the current value of the company’s existing assets and shows the actual amount of equity. This is of importance for a financing.
Significance of the Asset-Based Approach
Today, the asset-based approach plays only a minor role. The advantages are clearly the simple application and the good traceability of the result. A negative aspect is the low informative value for many companies, as intangible values and future developments are not taken into account.
Simplified Income Approach
valuation = revenue divided by capitalization rate
In the company valuation using the Income Approach, the company is viewed as an investment that generates constant returns. These constant returns are valued using the financial mathematical formula of a perpetual annual income stream. The average expected sustainable after-tax profits over the next three to five years are divided by a risk-adjusted interest rate (“capitalization rate”). The value thus determined represents the value of equity (so-called “equity value”).
Since the Income Approach is based on forecasts, the underlying values should be as realistic as possible. The result should also be checked for sensitivity to changes in assumptions (e.g. lower/higher earnings and interest rates). The question always arises as to what extent the existing earning power of the valued company can be transferred to the buyer in the event of a sale. (In-depth information on Income Approach methods can be found in the article “Income Approach for Company Valuation“)
Machinery or stocks of goods necessary for normal operations are already included in this calculation, as they are a prerequisite for achieving the sustainable yield on which the valuation is based.
Calculation of the capitalisation rate
Capitalisation rate = base rate plus market risk premium plus company-specific risk premium
The capitalisation rate is made up of three factors.
The base rate, or risk-free rate. It is usually the interest rate on government bonds with a maturity of 10 or thirty years. At the end of 2021, the prime rate in Germany was a rounded 0.10%.
The market risk premium, which reflects the entrepreneurial risk in the industry and country concerned.
The company-specific risk premium, which evaluates the specific business risks of the company.
For example, for the valuation of a craft business, an interest rate of around 20 % is usually realistic due to the often higher dependence on the owner. This was empirically proven by real purchase prices.
Factors for determining the risk premium
Fungibility: The company can be turned into money quickly, safely and without high costs. This is generally not the case for unlisted companies.
Role of the company owner: The company is very dependent on the company owner. All decisions and contacts are focused on him.
Company strategy: There is no comprehensible short-, medium- and long-term strategy.
Competition: Compet itive pressure is high, and as a small company with a small market share, there is an increased risk of margin pressure or even being squeezed out of the market.
Customer structure: A large proportion of sales is made with a small number of customers. There are hardly any switching hurdles for customers. The customers have aged along with the owner and will not be around for the foreseeable future.
Supplier structure: There may be supply bottlenecks or delays in production due to dependence on individual suppliers and there are no alternative options.
Management: insufficiently qualified and/or experienced. There is a risk that it will leave the company after a change of ownership.
Employees: The level of education of the employees is rather low. Suitable skilled workers are difficult to find on the labour market, which has a negative impact on future growth. There is a dependence on some key people who are not easily replaced.
Non-recurring revenues: Revenues are primarily generated from non-recurring customers.
Advantages and Disadvantages of this Method
Significance of the Income Approach in Germany
In Germany, the Income Approach is the most widely used method (IDW S 1). It is the valuation method legally prescribed for company valuation for inheritance and gift tax purposes. The Income Approach is applied accordingly by the tax authorities and enjoys high acceptance in legal disputes.
The Arbeitsgemeinschaft der Wert ermitteln Betriebsberater im Handwerk (Working Group of Valuation Consultants in the Skilled Trades) has developed the AWH standard for the valuation small and medium-sized skilled trades businesses. It is also based on the Income Approach and is accordingly adapted to the specific characteristics of these companies. For more information on valuation according to the AWH standard, please contact ZdH.
The discounted cash flow (DCF) method
This method has its origins in classical investment appraisal. Internationally, this is the valuation method with the highest degree of recognition.
Theoretically, the DCF method yields the most accurate enterprise value. The crux, however, is the need to project detailed future earnings or cash flows and the corresponding risk-adjusted interest rates (costing rate) to discount them to their present value.
The advantage over the Income Approach is its high flexibility, as it is not necessary to assume a single “sustainable income”; instead, one can, for example, forecast the development of the earnings situation separately for each of the next 5 years. However, this also increases the complexity and the need for explanation of the evaluation.
The DCF method is more suitable for valuing large companies. The starting point is always a business plan for the next 5-7 years. This method tends to result in higher company values.
In contrast to the Income Approach, which uses future earnings as a starting point, here the net cash inflows, so-called cash flows, are considered.
A distinction is made between the gross or entity method and the net or equity method. In practice, the majority of companies use the entity method, which is used to determine the enterprise value, i.e. the value of the company including financial liabilities.
The free cash flow of the company, including interest on borrowed capital, is discounted to the present day using the weighted average cost of capital of the financial resources tied up in the company. The calculation of the net present value is primarily intended to reflect the operating potential of a company.
As far as possible, an entire investment cycle should be considered, as investments in current and fixed assets have a significant impact on cash flows.
The forecast of cash flows and the choice of discount factors are adjusting screws with which results can be moved in the desired direction. In order to guarantee the reliability of the results, a sensitivity analysis that shows the influence of changes in the assumptions on the company value is essential.
The choice between the DCF method and the Income Approach, given identical assumptions, essentially has no influence on the valuation result. The choice of one of the valuation methods should therefore depend on the target audience and the purpose of the valuation.
Advantages and Disadvantages of this Method
Various averaging methods / mixing methods
Due to the estimation of values, the Income Approach is associated with uncertainties. The combination methods also include the substance of the company in their valuation.
The idea behind mean value methods is to include both past and future expectations and risks. This leads to a high level of acceptance, also and especially among companies in the SME sector. Commercial and craft enterprises and companies from the manufacturing industry use it for planned transactions, but it is also frequently used for family-internal succession arrangements.
The result is based on the weighted average of net asset value (NAV) and income value. Weighted usually means that double the income value is added to the net asset value (NAV). The result divided by three and increased by the non-operating assets gives the enterprise value. However, alternative methods are also used in which the shares of substance and income in the total value are weighted differently.
The mean value method or Berlin method
In the Average Value or Berlin Method, the arithmetic mean of the income value and net asset value (NAV) is formed. It is based on the idea that companies with low substance and high earnings are typically exposed to high competitive pressure, which will foreseeably reduce these earnings in the future.
Valuation = (income value + net asset value (NAV)) / 2
The Vienna procedure
In the Vienna Method, the arithmetic mean of the income value and net asset value (NAV) (asset value) is also calculated. However, the calculation of these two values differs, for example, from the Berlin method.
The lump-sum approach to the most difficult factors to determine makes the Vienna procedure a simplified procedure. The capitalization rate is set at nine percent. The uncertain forecast of future earnings is circumvented by taking the average of the last three financial years. The Vienna method is often used as an alternative procedure when parties cannot agree on other valuation methods.
Valuation = (income value + net asset value (NAV)) / 2
The excess profit method
The Excess Earnings Method is another average value method and is based on the assumption that, in the long run, profit only corresponds to an adequate return on net asset value (NAV).
As a consequence of the consideration that higher profit margins recede over time, excess profits that exceed the normal rate of return are capitalized at a higher rate of interest. Factors that may be responsible for a decline in profits include a worsening economy, increased competition, or the like.
The Swiss Method or the Practitioner Method
The practitioner method is easy to understand and follow and is often considered the first point of reference on both the buyer and seller side.
For successful companies, the practitioner method results in very conservative, low values for the company.
The Swiss tax administration also uses this valuation method. It calculates with a capitalization rate of 9.5%.
Valuation = 2/3 x income value + 1/3 net asset value (NAV)
The Stuttgart procedure
In the Stuttgart Method, the value of a company results from the sum of the net asset value (NAV) and the income value. This procedure was primarily used to determine the company value of unlisted companies in the event of inheritance or donations. As this procedure is no longer up to date, it was abolished in 2009.
Special cases
Special Case: Low Earnings with a Lot of Substance
The Schnettler Method addresses the special case of low-profit or unprofitable companies with a high net asset value (NAV) that do not adequately remunerate their assets. It is a hybrid method combining net asset value (NAV) and income value.
The depreciation of the high level of property, plant and equipment results in accounting losses. A buyer would capitalize the tangible fixed assets at reduced replacement costs, which would reduce depreciation and consequently increase the income value.
Frequently asked questions
Which is the best method for company valuation?
Depending on the valuationand the phase the company is in, one or the other method may be more appropriate. We recommend going through several methods to get a feel for what range the value is within. Nimbo works with the multiple method.
How does the Multiple Method work?
This method requires recently achieved prices from comparable companies as a basis for calculation. One examines for what multiple (“multiple”, “multiplier”) these companies were sold and applies this factor to the company to be valued. Multiples can, for example, be multiples of operating profit (“EBIT multiple”), earnings before interest, taxes, depreciation and amortization (EBITDA multiple) or sales (“sales multiple”).
Which method is used to evaluate a start-up?
With a start-up that is not yet making a profit and is growing strongly, you are valuing a promise for the future. The DCF method can be applied to business plans of start-ups. The discount rate used for this purpose is derived from the investors’ expected return.
For whom is the multiple method (multiplier method) suitable?
This method is primarily suitable for profitable companies that have been in existence for some time. Here, a multi-year profit trend can be used as a basis for valuation. The more stable the empirical values, the more meaningful the result. This method is not suitable for companies that are making losses or are in a strong growth phase.
