Business valuation is a key topic for managing directors and finance managers, especially in mid-sized companies and start-ups. It is the basis for many decisions, such as mergers, acquisitions, sales or succession planning. This article explains the most important methods and approaches to business valuation.

What is business valuation?

Business valuation is the process of determining the economic value of a company. This value can be determined in different ways, depending on the chosen method and the underlying assumptions. There is no one-size-fits-all solution; the right approach depends on the specific circumstances and goals of the company.

Valuation methods

There are several valuation methods, which can be applied depending on the purpose and situation:

1. Capitalised earnings method (Ertragswertverfahren): This method values a company based on its expected future earnings. It is particularly suitable for companies with stable and predictable cash flows.
2. Discounted cash flow (DCF): The discounted cash flow method is widely used. The company’s future free cash flows are discounted to determine its present value. However, it requires a careful and realistic estimate of future income and expenses, which is often difficult for start-ups.
3. Multiples method: This method uses key figures of comparable companies to determine the value of the company being valued. Commonly used multiples are revenue, EBIT or EBITDA.
4. Net asset value method: This method is based on the current book value of a company’s assets minus its liabilities. It is often used to value companies with substantial tangible assets.
5. Market value method: This refers to a company’s current market price as determined by supply and demand. It is particularly relevant for listed companies.

Valuation methods for start-ups

Valuing start-ups is particularly challenging because their future is often uncertain and historical financial data is lacking. These methods are especially suitable for start-ups:

1. Venture capital (VC) method: Tailored specifically to start-ups and widely used by venture capital investors. It consists of two steps:
   • Estimating the future company value: First, the potential future value of the company (exit value) is estimated based on comparable companies or industry data.
   • Discounting to present value: The future value is then discounted to today’s value, taking into account the risks and the target ROI (return on investment).
2. Multiples method: The company value is estimated using multiples of similar companies in the same industry. Typical multiples are revenue, EBIT or EBITDA. This method is particularly useful when there are comparable companies whose figures can serve as a reference.
3. Berkus method: A simplified method often used in a start-up’s early stage. It values a company against five key criteria:
   • Quality of the idea
   • Prototype or MVP (minimum viable product)
   • Quality of the management team
   • Strategic relationships and partnerships
   • Market entry and sales
   Each criterion is assigned a fixed amount, and the sum gives the company value.
4. First Chicago method: Combines elements of the DCF method and a scenario approach. Several scenarios (optimistic, pessimistic and realistic) are developed and the corresponding cash flows calculated. The company value is the weighted average of the scenarios, taking the probability of each scenario into account.

Applying it in practice

The right valuation method depends on various factors, such as the type of company, the industry it operates in and the specific purpose of the valuation. A technology start-up, for example, may be valued differently from an established manufacturing company.

Tools and resources

Various tools are available for carrying out a business valuation:

• Business valuation calculators: Online tools that can provide an initial estimate of company value based on simple inputs.
• Advisory firms and experts: Professional advisers can carry out a detailed, well-founded valuation.
• Software solutions: Specialised software can support complex valuation models and improve the accuracy of the results.

Case studies and examples

Example 1: A technology start-up in its early growth phase could be valued using the venture capital method. The potential future company value is estimated and discounted to today’s value. By taking market trends and comparable companies into account, a realistic value can be determined that is attractive to investors.

Example 2: An established mid-sized manufacturer could use the capitalised earnings method to determine its value. By forecasting future cash flows and discounting them, an accurate company value can be calculated that serves as the basis for sale or succession decisions.

Example 3: A seed-stage start-up can use the Berkus method to obtain an initial valuation based on the quality of the idea, the team and the product prototype. This helps win over investors early and secure capital for further growth.

Conclusion

Business valuation is a complex but indispensable process for strategic planning and decision-making. By applying the right methods and using suitable tools, managing directors and finance managers can determine the true value of their company and make well-founded decisions. It is advisable to keep up to date with current trends and methods in business valuation and to bring in experts where needed to optimise the valuation process.