Business Valuation
Business Enterprise Valuation
As an entrepreneur, you will be interested in a company valuation when considering the sale of your business, or part of it, as well as when significant long-term changes occur within the company. In these situations, valuation plays a crucial role.
This includes, for example, the following areas:
- Corporate strategy and objectives
- Products and services
- Sales and market (customers, market, competition, sales, marketing)
- Production and technology
- Procurement
And of course, the buyer also asks: What is the actual value of the offered company? Will I pay a price that will be recovered over the years? Will the purchase price be refinanced from future income, and how long will it take?
Most medium-sized and small business owners estimate the value of their company unrealistically, based on our experience. The perceived value of the business is influenced by personal feelings and, above all, the heart and soul that owners have invested in the company over the years, often at the expense of their families. The resulting estimated value is often too high. Most medium-sized business owners see the substantial value of the company in its substance -- buildings, land, movable assets, and current assets. The earnings value is only conditionally considered, even though it currently dominates market-based business valuation. Ultimately, the buyer should be able to refinance the price paid solely from the future profits of the acquired company.
Company valuation, as a methodological concept for price determination, evaluates the company neutrally and largely without the subjective assessment of the current owner.
In order to negotiate a realistic and sober purchase or sale of a company, a systematic (well-founded) business valuation is essential. Anyone who enters important negotiations or is confronted with an unrealistic price expectation will only waste a great deal of time, effort, nerves, and ultimately money. Those who have a realistic price expectation in advance can plan their negotiations accordingly, present arguments, and negotiate successfully.
In many cases, buyers have valuations prepared by specialists for their own use, or because banks require them.
Business valuation is an objective look at the company as a whole. This approach does not settle for just the presented Balance Sheet and Income Statement, but requires much more information to determine a fair and realistic enterprise value. Many figures in the financial statements are influenced by tax perspectives and often have nothing to do with actual values.
In advertisements, companies are often listed for sale without a price indication. This is usually because sellers are unwilling to pay for a professional company valuation, or do not want to reveal their price expectations in advance. During negotiations, however, they come to realize that the process is much more time-consuming for both parties. For the buyer, who has only basic information and makes an offer based on that, and for the seller, who must defend their asking price. In cases of doubt, the buyer always has the advantage and usually achieves a lower price.
We value companies using standard, currently common, and most frequently applied valuation methods. These include, for example, the Discounted Cash Flow method (DCF method) based on earnings analysis, as well as the method based on the analysis of the company's assets (substance method).
For profit-generating enterprises, the earnings method plays an increasingly important role in determining the price. A realistic projection of the company's future earnings -- future operating profit -- assumes continued generation in the future. Of course, many hard and soft factors are also taken into account.
Business Planning
There are many situations in which a business owner depends on accurate planning. First and foremost, planning for start-ups should be mentioned, which begins with an investment plan that often needs to be coordinated and approved by third parties. Important is the subsequent comparison of the actual state -- plan vs. reality. This enables the entrepreneur to recognize negative developments at an early stage and take corrective action. The planned assumptions are reflected through cost budgets into expected revenues and then into the planned income statement.
Essentially, two types of planning are distinguished -- top-down and bottom-up.
Top-down planning starts from the company's target, defined in terms of revenues and profits. Individual budgets are allocated to specific departments within the company.
In the bottom-up approach, the starting point is individual cost centers (or departments), where costs and revenues are captured, gradually building up to the overall company result.
Every plan is only as good as it is followed. That is why it is important to plan properly and discuss the plans, for example, with a consultant. A meaningful plan should be designed so that it can be adhered to under normal circumstances.