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1. The Net Asset Value Method – What Is the Company’s True Value?
This method derives the company’s value from its assets at market prices minus its liabilities. Unlike the liquidation value, this method assumes the company will continue operations, which tends to increase its value. A key factor is that, for example, the replacement cost of a machine is higher than the proceeds from its sale at an auction in the context of a liquidation. Furthermore, unlike in a liquidation, there are no additional costs, such as those associated with decommissioning or winding up operations.
The net asset value method is relatively simple to apply and has its origins in the early 20th century. Nevertheless, it remains valid to this day. Unlike the balance sheet, this method reveals hidden reserves and adequately accounts for valuable inventory and durable machinery. Since future earnings are not taken into account, the net asset value often represents the lower limit of a company’s value.
2. The Income Approach – The Future Matters More Than the Past
The income approach is derived from the discounted future annual net income. It is based on income and expenses reported under commercial law in accordance with the German Commercial Code (HGB). To ensure accurate calculation, the Institute of Public Auditors in Germany (IDW) has defined a recognized methodology in the IDW S1 standard, which is considered the “gold standard.”
The major advantage of the income approach is that it incorporates a company’s future earning potential—embodied in its employees, customers, processes, intangible assets, and their interplay—into the valuation. Key variables include the projected financial statements (particularly the final projected year) and the discount rate. While the latter can be derived objectively (e.g., from capital market data and risk premiums), the financial projections are highly company-specific and depend on strategic assumptions and objectives.
A lack of market knowledge or unrealistic forecasts can lead to significantly distorted results. Therefore, expert knowledge and sound judgment are required both in the planning process and in deriving the capitalization rate.
Note: The simplified income approach, which is used primarily for tax purposes, generally results in inflated values and is not marketable. It is therefore unsuitable for transactions.
3. Discounted Cash Flow (DCF) – The International Variant of the Income Approach
The DCF method is an internationally recognized valuation method grounded in financial mathematics. Similar to the income approach, it is based on discounted future surpluses—not on profits, but on cash flows. This makes it independent of specific accounting standards (HGB, IFRS, US-GAAP, etc.).
Another advantage lies in the greater flexibility of the model: assumptions regarding investments, growth, or financing can be modeled in detail. As with the income approach, however, sound planning and conservative assumptions are required here as well. For business models with regular cash flow—such as service providers or manufacturers with stable demand—the income approach and DCF often yield similar results.
4. The Multiplier Method – What Are Others Paying?
The multiplier method—also known as the “practical method”—is particularly popular among small and medium-sized enterprises. It is relatively simple and market-oriented. In this method, the operating profit (usually EBIT or EBITDA) is multiplied by a multiple derived from actual transactions involving comparable companies.
One advantage of this approach is that it reflects the perspectives of both buyers and sellers in the market. The challenge, however, lies in selecting and adjusting suitable comparable companies. The choice of reference value is particularly inconsistent: While buyers tend to use historical figures (often as an average of the last 3 years), sellers often include future earnings as well. A blended approach that weights more recent years tends to be sensible.
The multiples used can vary widely depending on the industry, size, and region. Blanket rules of thumb (“5× EBIT”) are risky. Particular caution is warranted with revenue multiples: While larger companies often command higher prices, the decisive factor is not revenue but sustainable profitability.
Conclusion: Which method is the right one?
There is no one-size-fits-all answer—the choice of valuation method depends on the purpose of the valuation, the industry, the earnings structure, and the target audience. For small and medium-sized enterprises in Germany, however, there are typical areas of application:
Asset-based approach: To provide a floor, e.g., in the event of liquidation or restructuring
Income Approach: For owner-managed companies with stable business performance
DCF method: For capital-market-oriented or high-growth companies with complex structures
Multiplier approach: For market comparisons, indicative valuations, or to verify plausibility
In practice, a combination of methods has proven effective: the asset-based and income-based approaches cover a broad valuation spectrum, the DCF method provides depth in financial modeling, and the multiplier method reflects market perspectives. This results in a realistic valuation range that provides guidance to both buyers and sellers.
Important: Business owners should not rely on individual figures or “formulas.” A professional business valuation requires experience, business management expertise, and knowledge of the relevant industry. Skepticism is warranted when methods are combined improperly or when unconventional approaches are pursued.
