This is especially true if profits have plummeted in the past and current year—or if a loss has even been incurred—as is currently the case for some companies.
It’s of little help to look back and think, “If only I had sold in 2019.” 2019 is over and won’t be coming back.
How will purchase prices develop in 2021 and 2022? “It varies” is the only accurate answer here. What will determine the trend in company purchase prices? Not necessarily the enterprise value! Enterprise value is a value calculated using standard methods such as the income approach, the discounted cash flow method, or the net asset value method. This valuation is based on the annual financial statements for the past three fiscal years, as well as revenue and earnings forecasts for the coming years. This is standard practice in accordance with the IDW-S1 auditing standard.
A sound business valuation is always the foundation of a business transaction—but it is just that: the foundation, the starting point. However, the number of millions—or sometimes just hundreds of thousands—of euros that the entrepreneur actually receives for his or her life’s work is practically never dependent on the scope, detail, or accuracy of the business valuation, but always on whether and how successfully a sufficiently large number of prospective buyers can be convinced of the company’s value.
What does this mean in concrete terms for business sale processes?
1. The declines in revenue and earnings that occurred in 2020 and 2021 must be identified as COVID-19-related, assessed in a business forecast regarding their long-term impact, and treated as such in isolation.
2. The company up for sale must highlight its core competencies in future-oriented fields to a potential buyer or investor.
3. Attracting a sufficiently large number of prospective buyers plays a crucial role in optimizing the sale price. Right from the start, the seller should consider what type of buyer they are looking for. Motivation, risk tolerance, and financial capacity vary greatly among strategic investors, MBI/MBO candidates, and financial investors. Large M&A firms such as EUROCONSIL, which specialize in small and medium-sized enterprises, ideally always have sufficiently large databases covering all three of the aforementioned potential buyers.
