Valuation & Pricing

1 What determines the value?

A company’s value depends on many factors. But be careful: “value” is not the same as “price.” Value is an estimate—price is the result of negotiation.

The Four Most Important Value Factors

• Profitability —How much profit does the company generate? This is the most important factor in small deals.

• Net asset value – What are the tangible assets worth? (Machinery, real estate, inventory)

• Market position – How strong is the company’s market position? Does it have any unique selling points?

• Future prospects – Is the market growing? Does the company have a clear strategy?

2 The Multiples Method

The multiples method is the simplest and most widely used valuation method for small and medium-sized businesses. The idea is simple: You multiply a key earnings metric by an industry-standard factor.

EBITDA vs. EBIT – What's the Difference?

• EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization

• EBIT = Earnings Before Interest and Taxes

• The difference: EBITDA excludes depreciation and amortization—this is relevant when significant investments are on the horizon

• Basically, it makes no difference whether you use EBITDA or EBIT—as long as you apply the appropriate multiple (EBITDA multiple or EBIT multiple). For small deals, the EBITDA multiple is the standard metric, and the valuation template is based on this

• Because EBITDA excludes depreciation, you need to keep a separate eye on investment needs—they’ll still affect you after the acquisition. Any investments the seller has deferred, you deduct via the price bridge (see Section 3). If the investment needs are consistently high, choose a more conservative multiple

What is “adjusted” EBITDA?

In owner-managed companies, EBITDA often includes cost items that do not reflect actual operating profit. For the purposes of business valuation using the multiples method, these are “adjusted” to reflect the company’s sustainable earning power even after the transaction:

• Owner’s compensation – Is the owner’s salary in line with market rates, or is it above or below average?

• Personal expenses – Company cars, travel, or other costs that the owner uses for personal purposes

• One-time items – Unusual revenues or costs that will not recur (e.g., legal disputes, insurance claims)

• Rent to Affiliated Companies – Does the company pay excessive rent for a property owned by the owner?

Typical Multiples for Small Businesses

Multiples vary greatly depending on industry, growth, and risk profile. The most widely used source for industry-specific multiples in German-speaking countries is the DUB SME Multiples. As a rough guide:

3 Reconciliation of Enterprise Value to Purchase Price

The multiples method yields an enterprise value calculated as if the company were debt-free and had no cash on hand—in technical terms: “cash and debt free.” In practice, this is almost never the case. Every company has bank accounts, outstanding loans, or other financial liabilities. Therefore, reconciliations are necessary to arrive at the actual purchase price from the calculated enterprise value.

The Price Bridge: From Enterprise Value to Purchase Price

The purchase price is calculated as the enterprise value plus or minus various adjustments:

• Minus: Financial liabilities (debt) —bank loans, shareholder loans, lease obligations

• Plus: Excess cash —cash on hand and bank balances above the level necessary for operations

• Plus/minus: Working capital —adjustment if current assets deviate from normal levels

• Minus: Investment backlog – Necessary investments that the seller has not made

Example: Price Bridge

Enterprise value (4× EBITDA): €800,000
− Financial liabilities: −€100,000
+ Excess cash: +€50,000
± Working capital adjustment: −20,000 €
− Capitalization backlog: −30,000 €
= Purchase price: €700,000

4 Price Negotiation

You’ve calculated the company’s value and established the price range—now it’s time to enter negotiations. How these negotiations unfold depends heavily on whether or not an M&A advisor is involved.

Advisor vs. Direct Sale—Differences in the Negotiation Process

• With an M&A advisor: There’s often a structured bidding process. The advisor collects offers and negotiates with the best prospective buyers. Your LOI may be competing with others.

• Direct sale (common in small deals): You negotiate directly with the seller. The negotiation is more personal, but also more emotional. Build a good relationship.

Competition Influences Negotiations

How much leeway you have in price negotiations depends largely on how many other interested parties there are. In a sales process with multiple bidders (common in advisor-led processes), you have less room to negotiate—the seller can weigh your offer against others. In a direct sale with little competition, your negotiating position as a buyer is significantly stronger.

After Due Diligence: Re-evaluate the Valuation

The business valuation, which is firmly established in the LOI, is not the final word. After due diligence is completed, the valuation is reevaluated. Findings—whether positive or negative—may require an adjustment to the purchase price. Examples include undiscovered liabilities, expiring key contracts, or a stronger customer base than expected.

5 Template: Your First Review

With this simple template, you can conduct an initial valuation on your own. All you need are the target company’s financial statements or IM data.

Step by Step

1. Calculate EBITDA – Take the earnings before interest and taxes from the financial statements and add depreciation

2. Make adjustments – Adjust the owner’s compensation to market levels, exclude one-time items, and remove personal expenses

3. Select a multiple – Use the table above and the company’s industry as a guide

4. Calculate three scenarios —conservative (low multiple), realistic (medium multiple), optimistic (high multiple)

5. Establish a price range – Enterprise value ± adjustments (debt, cash, investment backlog) = purchase price range

What’s next? Figuring out financing

Once the business valuation is complete and you have a realistic price range, the crucial question arises: Is the purchase feasible with your available equity? To answer this, you should analyze two factors together:

• Debt financing – How much bank financing or grants can you use to supplement your equity?

• Transaction structure with a seller loan – Is the seller willing to provide part of the purchase price as a loan? This can bridge the equity gap.

Only when the valuation, financing, and transaction structure align will you know whether the deal is feasible for you. Learn more in the modules “Understanding the Transaction Process and Deal Structures ” and “Acquisition Financing.”