The company valuation explained by an example ..

The company valuation by way of an example explains

The basis of the assignment for the company valuation by an expert is today part of the standard offer of a management consultancy in the M&A sector. The question: How do you rate a company to sell it, we want to answer by the following example. In the following article, we'll use an example to explain how to evaluate a company for business sales. The company value of an example GmbH is to be determined. Example GmbH has instructed the appraiser to prepare an expert opinion to estimate the company's value in the context of a planned (partial) sale of the company to an as yet undetermined acquirer.

How to do this and limitations of company valuation

The task of the elaboration is the determination of an argumentation value or a price floor for an sole proprietor, in the context of a possible sale of the undertaking to a successor who continues the undertaking. This elaboration is clearly focused on the presentation of an appropriate evaluation logic. It is based on the hypothetical figures of the annual accounts as well as the BWAs of different periods of recent years as well as on the personal explanations of the owner of the company. The figures and data have not been examined in more detail, but are only used as a first basis. Possible changes in the averages for the past resulting from a longer period of observation are not taken into account, nor are possible developments in the income to be achieved after a takeover and the expenses incurred which would be relevant to the acquirer. This example report is therefore not an opinion in accordance with IDW S1, the standard of the institution of auditors for company valuations, and would therefore possibly not be recognised in court.

Company Valuation Company Sales

IDW S1 – Principles for the execution of company valuations (Germany) According to the company valuation standard IDW S1, the enterprise value is determined in the earned value procedure by discounting the financial surpluses that flow to the company owners. The capitalization interest rate consists of a base interest rate of an alternative investment (quasi-risk-free capital market investment) and a risk surcharge is made and personal income taxes are taken into account. Personal income taxes are assumed at a typed interest rate of 25% (withholding tax).

Source Wikipedia

In the event of a price that is actually lower in the event of a sale of a company, no liability is assumed. The same applies if the willingness of a potential buyer to pay is higher than is the result after this elaboration and the possible derived purchase price claim.

In our now following example of company valuation, we also want to answer the following questions:

The business model of the company to be evaluated

The owner wants to sell the company he has set up and currently manages it to an investor who is not active in the company. At the same time, if possible, a manager already working in the company should take over the management and be involved with a certain share in the company. The entire company concept and also the employee base should be taken over as completely as possible. In which time process and in which legal constellation the takeover could take place in detail, the following consideration should not be only play an indirect role.


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In this example, the asset that dominates the balance sheet with an almost 80% share is "claims against social society". It is assumed that the transfer of the company would take place without this asset. Otherwise, the purchase amount would have to be increased accordingly.

For more information on the example company for a company valuation:

The company is managed by the owner and is located in the real estate business. There is an umbrella organization and other branches where other brokers have organized themselves. Revenues are generated from the sale and valuation of consulting services. There are other office structures in the branches. Customers are advised on site or via the Internet and by telephone.

Valuation of the company Example

1. Procedural choice

In principle, substance-value-oriented and market-oriented procedures are eligible for the valuation of the company.

Substance value of the lower-level evaluation

The composite substance value consists of the "substance" as part of a thing or a right and its "value". The substance value is generally part of the field of valuation. It is an inventory size that is based on the physical value of a valuation object.

Source Wikipedia

If the above assumption is correct that the dominant balance sheet assets in our example, the exposure against shareholders, should not be sold, the essential part of the value of the company is not the assets recognised on the balance sheet, but the intangible, non-accounting, original goodwill that is reflected in valuable market relationships, qualified and motivated employees and well-established business processes. In that, the substance value that can be deduced from the balance sheet does not lead to a meaningful valuation. Moreover, the current balance sheet values in the example are not known to the expert. Therefore, the balance sheet values are completely disregarded in the analysis. Should significant assets nevertheless be taken over in the event of a sale of a company, the company value determined in accordance with the expert report could easily be corrected accordingly. It would be logically wrong, however, to add the value of the (net) asset to the determined yield value.

Comparative value of the company valuation

The comparative value method is a method for the valuation of real estate (Section 15 Real Estate Valuation Ordinance – ImmoWertV). According to this procedure, the market value of a plot of land is derived from actual realized purchase prices from other immovable property which, in terms of location, use, soil, cut and other characteristics, is sufficiently consistent with the land to be compared.

Source Wikipedia

Similarly, an assessment according to comparative or market values is generally possible. The value of the company is determined here by the price or price of the with which success multipliers other comparable companies have recently been sold. However, this would require that appropriate comparative figures be available. The evaluations from the IDV company comparison can only be used to a very limited extent. In addition, the often chosen approach of sales multipliers only makes sense if roughly comparable EBIT brands have been generated by the companies to be valued and the compute companies. However, this is usually and also in the concrete case of Example GmbH not given. Other comparative figures on multipliers of net performance figures are also available in sufficient numbers and with the necessary additional information on the comparability of enterprises. The valuation by market multipliers is therefore not included.

Earnings value of the company valuation

A (modified) yield value method is more appropriate for the determination of value.

General assessment philosophy:

The minimum value from a seller's point of view corresponds to the present value of the payment stream, which he renounces by the (partially) abandonment of the company. The maximum value of the buyer is determined by analogy as the sum of the expected to flow from the company (or financial surpluses to which it is entitled, which are discounted at the time of purchase. The future cash flows can/should be derived from the planned annual results (i.e. with the help of the income statements). On the estimation of this value ( or more precisely: the formal approach to this ) will also be the focus. The consistently payment-flow-based analysis is dispensed with.

2. Valuation according to the modified earned value method

In the case of the earned value method, the future surpluses reflected in the annual accounts, which are due to the owners of the undertaking and which may flow to them through withdrawals and/or executive remuneration, shall be estimated. This requires, on the one hand, an estimate of future income and, on the other hand, the expected expenditure.

So we have to look ahead. Nevertheless, in order to use a more robust basis, one sensibly orients one's way towards the sales of the past periods and then examines which corrections are appropriate. This is especially true when the last few years have not brought any particular ups and downs. Since the basic business of Example GmbH in particular is dependent on the economic situation, in this case such influences should be taken into account in order to use a larger observation and comparison period in case of doubt for the formation of an average value. However, the data necessary for a longer-term consideration are not available here. From the seller's point of view, the first approach is to assume what surpluses would be generated in the future if the previous owner continued the business. From the buyer's point of view, the transactions realised by the current owner must then be checked to what extent they are transferable, i.e. whether they are likely to be the same and high in the new company. For this purpose, for the periods after his partial or total retirement, the first so-called personal transactions that are exclusively linked to the person of the previous holder. Such transactions are not to be recognized in the documents.

It is also important to estimate:

  • What future revenues can be expected from existing transferable contracts?

  • What future sales can be expected from the effectiveness of the market position and the level of awareness of the company and the persons represented?

  • What future revenues can be expected from the increase in synergy effects? It would be necessary to estimate the surpluses that can be achieved if the company to be acquired is integrated into a larger network. This is probably not planned and therefore meaningless.

Ultimately, these variables can only be specified in a joint conversation between buyer and seller. This also applies to the possible rates of increase in sales in the coming years. They depend to a lot on the chosen model of the transition of companies to the buyer.

Resulting enterprise value using the example

Three steps are required to determine the company's value:

  1. It is necessary to determine the expected surplus/net income for the acquirer,
  2. It is necessary to estimate how long the good will of the company established by the owner is effective, i.e. generates surpluses for the company and thus for the acquirer,
  3. An interest rate must be set for the discount of the net income expected in the years of good will effectiveness in order to derive the value of the relevant surpluses on the current reporting date.

Determination of net income for the example of a company

Since there are no divergent data and no indications of any material changes in the future, the further calculation, nevertheless as the starting point of the discussion, is based on the assumption of the continuation of the average turnover figures for the comparative years example year 1 to example year 4. The average turnovers are as follows ( thousand € ). Here is a description of the sales of the last four years of the sample company.

Year T-3 Year T-2 Year T-1 Fiscal Year Current Average
440 369 480 497 446


Sales for the current year ( current financial year ) are extrapolated to annual sales in this way, as the same share of sales achieved in the first six months of the previous year and extrapolated from the basis to potential annual sales. There is no need to increase the weighting of more recent years. The average turnover of 446 thousand euros calculated in this way is the starting point for further calculations.

Other operating income is included because, as far as can be seen, they are not based on regular performance by the company, but on facts based predominantly on one-off situations. In the same way as for sales, the expected future development of the effort can be estimated. Based on the average costs of recent years for which the data are available, the part which is due to specificfeatures of the current company structure (additional costs of private living) should be excluded, i.e. it might not be incurred in the future, and to increase the part that may be added.

Valuation of personnel expenses for company valuation

In the case of personnel expenses incurred by Example GmbH, this is very low. Above all, despite a third-party management, there appears to be no or only a very low executive fee. For further analysis, it is assumed that the personnel costs continue to be in the previous amount, i.e. compensation for the necessary benefits of employees.

However, if a current employee takes over the management when implementing the business and transfer model outlined above, it must be considered from the point of view of an acquirer of the majority of the company that the costs of managing directors may lead to increased management expenses, which would then reduce his surplus share accordingly. In other cases (purchase of the company by a person who also takes over the management) would be negligible for a clean calculation of the surpluses of the executive salaries at the GmbH or to interpret it as part of the entrepreneur's wage, which forms part of the surplus to be drawn from the enterprise. In order to show the possible effect of the above assumption on the purchase price, in addition to the variant, consistent managerial costs are also calculated, the variant is calculated that the managing director's costs increase by 15 thousand euros.

The item "material expense" is unclear, which is fed to a large extent from sales commissions. In the case of an external candidate, it is assumed that these are the same amount as in the past, depending on the turnover. It will also be necessary for the other types of expenditure to check the historical values to see whether they are necessary and appropriate in the previous amount or are influenced by personal influences. (probably, most notso. Rents, cars ) Also expected cost increases have to be taken into account. Here, too, the Example GmbH does not show any structural need for adjustment of the figures from the available data.

Overall, we use amounts taken from past data in the first approximation without further plausibility checks. On the basis of these figures, the following preliminary and rough estimate of future business successes in ( € thousand ) is given.

Average sales 446
Materials 180
Personnel costs 16
Otherwise. Effort (e.g. Afa. Rent/advertising/cars 116
Surplus (before interest and taxes) 125
alternative ( with higher management costs ) 110


The material expenditure ( = predominantly sub-broker commission ) is again calculated as an average of the last 4 years without knowledge of the exact origin and personnel allocation. The figure for the full year ( current fiscal year ) has again been determined in such a way that the same percentage as for ( year T-1 ) of sales was calculated on the estimated total turnover ( current fiscal year ). If the purchaser himself were to generate more than a quarter of the turnover than has been the case up to now, the sub-commissions to be paid to third parties could be reduced by this change. The remaining surplus would then be correspondingly higher. This would probably be particularly true if a current employee who is paid on a commission basis took over the company. This would result in the commission payment to these employees. This aspect is not taken into account here.

The estimated personnel costs are calculated in a comparable way. Here, however, the value for ( current financial year ) has been extrapolated linearly from the first eight months. All other types of expenses are summarized and calculated in a comparable way as the average value of the financial years considered. The following values are obtained:

Year T-3 Year T-2 Year T-1 Fiscal Year Current Average
146 124 117 117 126


For depreciation, the approach of an average size from the historical data is obviously not appropriate, as there are massive changes. For reasons of simplification, however, this remains as neglected as the apparent trend of reducing other expenditure (but partly explained by the reduced depreciation). If the figures thus derived are also used for the further development of the company, an amount of

125 ( Thousand € )

as (initial) annual income before interest and taxes for the potential purchaser of the enterprise. The surplus size EBIT ( Earnings before interest and tax ) is a useful measure for measuring net profit for the period, as it neutralizes different financing structures and tax burdens.

When considering it, you may be increased by 15 t€ of the costs of the managing directors, a surplus of 110 t€ would remain.

If in the first year the current owner continues to offer his cooperation ( and the purchaser accepts this offer ), then it would be necessary to examine how this affects the turnover and the expense side. If necessary, corrections to the above figures would be appropriate.

Company valuation Example: Estimating the duration of the good will's effectiveness

In order to calculate the enterprise value, it is now necessary to estimate the duration of the effectiveness of the assumed good will (intangible enterprise value ) from the name, market position, employees and organisation. This assessment is certainly the most difficult part of deriving the expected net results.

The duration of a company's good will's effectiveness depends to a large extent on what it is based on, which is what it depends on. If it is dominantly carried out of the direct work performance of the current owner, then he may evaporate relatively quickly with his departure, i.e. (h). Little and only briefly transferred to the new owner. This applies to management consultants as well as to doctors, tax consultants and similar highly personal, d. (h). Services linked to the quality and intensity of the holder's personal performance. In the case of a "standing" company, where a business purchase is ideally only reflected in the change of ownership position, but does not change the entrepreneurial processes and potential for success (at least not in the negative direction ), the investor acquires a payment stream for an unlimited period of time.

The business model described by the owner corresponds to the latter model. The Example GmbH operates largely without the operational cooperation of the owner and therefore ideally generates the same payment flow for a new investor/owner for the current owner. If the company as a whole is perceived as a brand on the market, then this can perpetuate the current market successes (external one-feet are neglected).

Therefore, without being able to prove this with hard facts, we assume below that the good will of the company does not evaporate and that the average surplus calculated for the past will be achievable over all subsequent periods of this magnitude. A possible nominal increase solely on the basis of the compensation of the rate of price increase is therefore little taken into account as a potential of the expansion of the enterprise.

Discount rate for the Enterprise example

Surpluses of future periods must be made by discounting to the current date in order to determine the present value of these surpluses, which a purchaser is likely to be able to withdraw from the company in the future from today's perspective.

This interest rate is to be determined on the assumption of full self-financing. From a financing-theoretical point of view, it corresponds to

\[ k_E = r_f + (r_M – r_f) \]

The return claim\[ k_E \]

owners to the capital you use is made up of the risk-free

Market interest r\[ate r_f \]

and the risk premium\[ (r_M – r_f) \]

which is required and paid for on average on the market for risky investments. The risk premium is still weighted against the specific risk of this investment, measured as A. The B reflects the extent to which the investment to be valued fluctuates in the return on the market.

As a risk-free interest rate for long-term investments, approx. 1-2%. According to the results of numerous empirical studies, the long-term average of the risk premium is approx. 4.5 to 5%. In the absence of suitable data to derive an appropriate value for the . Small companies, particularly those not traded on organic markets, are generally charged an additional risk premium of the order of 2-3%. An approach of the 2% surcharge thus calculates a capital interest rate of

\[ k_E = 2 + (5+2-2)*1 = 7% \]

Company valuation: Calculation of the present value of the surpluses

From the annual average surpluses as "eternal" pensions calculated above, the discount rate of 7% is calculated as a present value of

1,778 (€000)

The calculated present value is a gross value without taking into account the tax burden for the purchaser when purchasing the company. At a flat-rate tax rate of 35% at the corporate and personal levels, the basic version assumes a surplus of 125 T€ and a discount of 7%, a cumulative net surplus size for the acquirer is calculated in the amount of

1,156 (thousands of euros)

Each of these amounts can fluctuate up or down by 2-3% points.

Conclusion and overall result of the assessment of the subject

Under the assumptions made, we come to a value of the example of companies of approx.

1,100 – 1,300 (thousands of € )

The impact of alternative assumptions (revenue development, development of cost components, duration of the effectiveness of the good will, discount rate, tax rate ) on the result can be determined relatively easily by replacing the respective calculation variables.

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Dipl.-Ing. Andrea Wilkesmann

For many years I have been writing articles for the area of ​​company exchange, company succession, company sale and company purchase. I am an M&A expert and a passionate consultant.