One’s own business is often a lifetime’s work and therefore holds special sentimental value. However, this value often does not correspond to the actual value—and certainly not to the price that can be realized upon a sale. EBIT tables are a common tool for calculating approximate company values. They contain so-called multiples, which serve as the basis for a valuation depending on the industry and company size. The problem: Most studies focus on large or even publicly traded companies. These have little to do with the market conditions typical of small and medium-sized enterprises (SMEs) with revenue under ten million euros. In this segment, the multiples—and thus the valuations and purchase prices—are, on average, significantly lower.
Different Risk Categories
What accounts for these sometimes substantial differences? While large companies may sometimes be slower to react, this also helps when market conditions deteriorate. The loss of a major customer is usually much easier to absorb than for a very small company, for which such a loss could represent its entire annual revenue.
In addition, small companies are generally much more owner-dependent. Especially in the event of a sale, contacts and know-how leave the company, and the risk that neither will be fully transferred to the successor is often factored in with a price discount. Even within the revenue range of 10 million to 50 million euros, significant variations are evident. The smaller the company, the greater the risks tend to be, which are reflected in a lower purchase price.
Starting Realistically
Using the wrong comparison group often leads to gross misjudgments by owners—sometimes with serious consequences. The German Business Exchange DUB.de now publishes SME multiples based on operating profit (EBIT). These enable business owners to estimate the achievable sale price much more accurately than before. The closer prospective sellers start with real results, the fewer complications and disappointments are to be expected in the sales process. The multiples are based on completed transactions. When applying and using the table, it should be noted for the sake of clarity that this does not replace an individual valuation and can only serve as a guideline for the user. If, for example, the company does not exhibit the typical SME risks, the valuation and price may even exceed the ranges.
