Certainly, it’s always interesting for an entrepreneur to know the value of their business. However, this value only becomes necessary in specific situations, such as
business succession to internal or external successors,
when buying or selling a business, in the event of a spin-off or merger,
in the event of an inheritance, gift, or lease; when owners or investors join or leave the company;
planned financing, disputes among owners regarding business valuations,
when determining claims for equalization of accrued gains, or
in the context of civil or criminal proceedings
Various methods of business valuation are available to determine the value of a business. Please note that not every method may be used for every valuation scenario. Operational requirements, legal and tax regulations, a multitude of court decisions, and, not least, application guidelines from the tax authorities largely determine which method should be used for the valuation. The following provides a brief overview of the common methods for determining a company’s value.
The Tax Method
Tax-based business valuations are governed by the Valuation Act (BewG). They constitute a procedure primarily used to determine inheritance and gift taxes. It should be noted that the tax-based business valuation is based almost exclusively on the past three years (tax balance sheets). The BewG does not take future earning power into account. As a result, this may mean that the enterprise value determined under the BewG exceeds the prices that could be realized on the market. For this reason, the BewG also permits the use of alternative, market-based methods for valuing the enterprise, thereby reducing the tax burden.
Income-Based Methods
Income-based approaches to business valuation assume that the true value of a business derives primarily from its ability to generate future profits. In addition to analyzing past performance, this approach also focuses on the company’s future and its expected profitability. In this process, both the opportunities and risks as well as the company’s strengths and weaknesses are analyzed and taken into account in the future forecast.
Among the most important income-based methods are the income approach and the discounted cash flow (DCF) method. Both are so-called net present value (NPV) methods. These valuation approaches are the most widely accepted.
Asset-Based Methods
Asset-based methods determine a company’s value based on the current market values of its assets. The goal is to determine the enterprise value that would be required to rebuild the company from scratch with its current assets. However, this method is also used to determine the liquidation value in the event of a business closure.
Comparable-based methods
Comparable company analysis is based on the identification of actual historical or recent corporate acquisitions or sales involving companies that are substantially and structurally comparable to the company being valued. This approach assumes that similar companies in a functioning market must command similar prices. One such method is the so-called multiplier approach.
In conclusion, we therefore recommend that you always have your company’s valuation performed by competent professionals.
