Business valuation

When do you need a business valuation?

• Normally, when making a purchase or sale of a business
• Liquidation or insolvency proceedings
• Mergers
• Change of shareholders or partnerships
• Management Buyout
• Expropriation

Common to these occasions is, that they all lead to a change of ownership. This means, that the ownership transition with regard to the share of the Company, from one to the other party. Errors in company valuation often result from poor definition of objectives or inaccurate compilation of historical data.

The various methods

Evaluation method

This method is used to determine the gross capital value of the company. Future incoming and outgoing payments are determined and discounted to the present day. For this it is important that we choose realistic future interest rates and predict the future cash flows as closely as possible. This is also the biggest challenge at the income capitalization approach. Prerequisite for a reliable prediction is thus logically a clean past analysis. This is classically divided into 6 areas:

• Definition of the evaluation object
• Representation of the legal and contractual conditions
• Market analysis including all products
• Overview of the financial situation
• Strengths and weaknesses analysis
• Analysis of production capacities, required investment, opening up new sources of finance and human capital

Since it is a future forecasting and management is at best react differently to different changes in the market, several scenarios are often played out and counted. These are assessed with a risk factor and weighed. This then results in a weighted average.

Discounted cash flow method

As with the income value, future cash flows are analyzed in the DCF method. However, this is possible in two different ways. On the one hand there is the gross method ( entity approach ) and on the other the net method ( equity approach). The gross method is expected with the APV (Adjusted Present – value ) and the WACC ( Weighted Average Cost of Capital). The net method brings out the flow to equity , which is the income of the discounted cash flow method .

Details about the different key figures you can find on Wikipedia:
Flow to equity

None of the various methods is preferable to the other. Because they are based on different assumptions, the results differ from each other. A weighted average can finally make sense and reflect the company’s value well.

The single assessment procedure

This is divided into two areas: liquidation value and net asset value. In the former, the balance sheet is analyzed by product, which a single busting value can be assigned. The total amount of the transfer fee will be charged subsequently debt.  When asset value is more about the value, which continuation of the company generates or maintains. The ideology behind this is that the company is at least as much valuable as an identical start-up of the same company. Assets and liabilities are divided into mission-critical and non-operating items. From practice, then it often knows that the asset value will be charged ultimately with the discounted cash flow in a mixing process.


Common mistakes in business valuation

Aside from some unrealistic assumptions and forecasts , to determine the company’s value can lead to poor results. Common mistakes are :

• Inaccurate Definition of the evaluation object

• Inadequate analysis of the past

• Errors in discounting

• Risks are hidden

• Synergies from mergers estimated wrongly

• Seemingly not relativized accurate data

• Too optimistic forecast of future earnings

Thank you very much for your interest in this article. I hope you succeed in buying or selling at a good price. If you need business help in this process, I would be very happy if you contact me.

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