Company valuation

The reasons for conducting a business valuation are as diverse as the calculation methods used for this purpose. Below, three traditional accounting-oriented methods are presented.

Substance Value and Practitioner Method

The substance value method is considered the simplest procedure in business valuation. The business value is calculated as the sum of the current assets and fixed assets from which the latent tax burden is deducted. Future income, know-how, and relationships with customers and suppliers are not taken into account in the substance value method. For this reason, the method is only suitable for companies that generate no or only minimal profit.

In the practitioner method, the substance value is added to the earnings value of the last two fiscal years, and the result is then divided by three. Tax authorities also use this method to calculate the market value of non-listed companies.

Earnings Value Method

In the earnings value method, the business value is determined from the ratio of the average adjusted operating earnings to the capitalization interest rate. The operating earnings are adjusted for expenses and revenues that are non-operational or extraordinary. Typically, the values from the last three years are used for the calculation of average operating earnings. The capitalization interest rate consists of the base interest rate for federal obligations, an immobility premium, a deduction for inflation protection, and a risk premium. Currently, a capitalization rate of 10% can be assumed, although this percentage is contested and heavily depends on the risk assessment and assumptions about interest and inflation trends.

Discounted Cash Flow Method (DCF Method)

In the DCF method, an initial step involves creating a detailed budget for the coming years to determine the amount of future cash flows. For the cash flows beyond the planning period, a residual value is calculated, which accounts for approximately 50% of the business value. Subsequently, the cash flows and the residual value are discounted to the valuation date to obtain the present value of the cash flows. This present value is then increased by the non-operational assets (e.g., participations) added, and deducts the external capital. This results in the effective value of equity or the value of the shares.

As the DCF method is based on future cash flows, this method is only suitable for companies that have generated regular profits over years.

• Further Information
   
• Calculate Offer for Trusteeship