No Easy Task: How Do You Successfully Value a Company?
“Any calculated valuation of a company is just smoke and mirrors,” says Matthias Ehnert, managing partner of ENWITO, which provides consulting services for company sales under the intelligentis brand. In his opinion, a calculation based on the IDW S1 valuation standard, for example, is of no use in a business sale, since the market price must always be determined during the sale. However, a business valuation makes perfect sense as a starting point and to compile all documents relevant to the sale.
Calculating Value Using Net Present Value-Oriented Methods
When it comes to overall valuation methods, both net present value-oriented and market price-oriented approaches are available. At intelligentis, they prefer net present value-oriented methods when there is sufficient data available for the small-to-medium-sized enterprise. The discounted cash flow method, or income approach, is recommended by the Institute of Public Auditors. It can be used to calculate both the total enterprise value and the market value of equity.
Here, as with most other valuation methods, the following applies: All data must be adjusted to account for the company’s specific characteristics. Factors to consider include the assets of the selling entrepreneur and other key stakeholders, market conditions, the size of the market niche, any dependence on key customers and suppliers, the lack of access to capital markets, and the size of the product portfolio.
Only the actual market price counts
“There is no such thing as a perfect method,” explains Ehnert. “Ultimately, only the actual market price counts!” The M&A specialist illustrates the situation with two examples: A fictional first owner estimates the value of his company at three million euros. He receives a dozen indicative—that is, initial, non-binding—offers, most of which fall well short of his asking price. The entrepreneur can’t quite decide what to do. The prospective buyers back out, he merges the company with another, and ends up receiving significantly less.
Here’s a better approach: Professional preparation and support
Things go better for the second owner: “Together with the previous owner, we optimize the company for sale and professionally prepare the documentation. We determine a company value of one million euros and sound out the market on the owner’s behalf. We receive ten indicative offers ranging from 300,000 to two million euros. The business owner sells for 1.5 million euros to a strategic investor who continues the customer relationships and takes on all employees,” Ehnert explains the abbreviated process.
A result that far exceeds expectations
Both business owners achieved a fair selling price—fair in light of the circumstances of their sale. On the one hand, unrealistic expectations, poor preparation, and indecisive action lead to a low sale price. On the other hand, good preparation, flexible expectations regarding the purchase price, and a professional approach to the market yield a result that far exceeds expectations. “We’ve experienced both situations, ” says the managing director.
