{"id":6012,"date":"2023-11-14T13:57:12","date_gmt":"2023-11-14T12:57:12","guid":{"rendered":"https:\/\/www.blok-management.de\/methods-of-company-valuation\/"},"modified":"2024-10-11T09:54:19","modified_gmt":"2024-10-11T07:54:19","slug":"methods-of-company-valuation","status":"publish","type":"post","link":"https:\/\/www.blok-management.de\/en\/methods-of-company-valuation\/","title":{"rendered":"Methods of company valuation"},"content":{"rendered":"

Company valuation plays an important role in the course of any M&A process and in particular during its preparation. Both sellers and buyers carry out a valuation in order to determine a price range. Although there is no such thing as an objective company value, there are various methods for calculating it. These do not necessarily lead to the same result. As the company value depends largely on the individual criteria of the person carrying out the valuation, it makes sense to use different valuation methods. The most common methods for company valuation in practice are presented below:<\/p>\n<\/div>

1. discounted cash flow (DCF) method<\/h3><\/div>

In the DCF method, future cash surpluses (free cash flows) are discounted to their present value. There are two approaches that can be used: i) the entity approach and ii) the equity approach. Under the entity approach, the total cash flows for equity and debt providers are determined and discounted to the valuation date using the weighted average cost of capital (WACC). With the equity approach, only the cash surpluses for the equity providers are taken into account and discounted using the return on equity. Advantages:<\/strong> The DCF valuation is forward-looking and therefore takes into account the future growth prospects of a company. The DCF valuation is flexible and allows various assumptions to be made. Due to the various assumptions, it is easy to carry out a sensitivity analysis and determine how the company value will change under consideration of different assumptions. Disadvantages:<\/strong> It is difficult to make the right assumptions, both for business planning and for the valuation. Deviations in the assumptions can lead to significant changes in the result.<\/p>\n<\/div>

2. multipliers (multiple) method<\/h3><\/div>

This method uses multiples to determine the value of a company. For this purpose, a business ratio such as EBITDA is usually multiplied by a factor (multiplier) that is customary in the industry. There are two approaches to determining suitable multiples: i) comparable transaction analysis (CTA), ii) comparable company analysis (CCA). CTA refers to the determination of multiples based on similar recent transactions of comparable companies. CCA uses the valuation of listed comparable companies. Advantages:<\/strong> The multiples method is a relatively simple method and involves only a few assumptions. Due to the two methods, past multiples can be analyzed with the transaction method and future multiples with the comparable company analysis. However, it should be noted that the two methods are not comparable, as the transaction multiples can also include synergies and a so-called control premium, while comparable company multiples only take into account future corporate and macroeconomic factors.
\nDisadvantages: <\/strong>The comparability of companies is subjective. There is also a lack of data availability, particularly when valuing small and medium-sized companies. A further weakness of the transaction multiples is the time lag between the valuation date and the date of the comparable transactions and therefore the economic situation. Furthermore, without sufficient data it is difficult to adjust the multiples for synergies.<\/p>\n<\/div>

3. net asset value method<\/h3><\/div>

The net asset value of a company is the sum of the assets that can be recognized in the balance sheet at current reproduction values less liabilities. It represents the expenditure that would be required to rebuild the company. Advantages:<\/strong> It is relatively easy to apply; in addition, future forecasts and the associated uncertainties are not significant with this valuation method. Disadvantages:<\/strong> The valuation of tangible assets in their entirety is not applied here. Furthermore, no statement is made about the profit potential. In addition, the intangible values are only calculated on the basis of estimates. There is a risk here that the enterprise value can be distorted using the net asset value method. This is why this method is rarely used in practice.<\/p>\n<\/div><\/div><\/div>

Company valuation methods – Our conclusion<\/h3><\/div>

Company valuation plays a decisive role in every M&A process. There are various valuation methods, of which the DCF method and the multiples method are the most common in practice. The DCF method offers the advantage of being future-oriented and taking into account the growth prospects of a company. It is flexible, but entails the difficulty of having to make various assumptions, which can sometimes lead to considerable changes in the result. The multiples method is comparatively simple and involves only a few assumptions. However, comparability is subjective, especially for small and medium-sized companies, and there is often a lack of data availability. Overall, it is clear that none of the valuation methods is objective and can deliver different results. It is therefore advisable to use several methods and to take the individual criteria of the evaluator into account.<\/p>\n<\/div><\/div><\/div>

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