The valuation of a company always depends on the case. It is impacted by factors such as the company’s history, future prospects, assets and debts, and the entrepreneur’s contribution to the profit.
When you are determining the value of your company,
Assess your company’s development based on your reflections and financial statements. This will provide you with basic information on how to determine the value of your company. The most common ways to calculate the value of small companies are the net asset value, the investment value and the EBITDA-based value. Other methods include the free cash flow model and determining the benchmark market value.
Keep in mind that, in addition to the imputed value, the purchase price is also impacted by business value, or goodwill. Goodwill includes your company’s difficult-to-value, intangible aspects. It consists of your company’s brand, employee competence, patents, customer relationships and good reputation. There is no formula for calculating goodwill, which makes it difficult to estimate.
Determining the value of a company is challenging, so it is usually a good idea to turn to an external party, such as a corporate broker or legal expert.
The net asset value of your company indicates the amount of your company’s debt-free assets. At its simplest, you can calculate it by deducting all of your company’s debts from its assets.
When calculating the net asset value of your company, do not use the official balance sheet; instead use one that is adjusted to the normal situation. This way, it better represents the fair price of your company’s assets.
Note that although the net asset value is often used as a minimum price in a purchase, it is not usually the final purchase price. This is because the sale usually involves much more than just your company’s material assets. Your company’s intangible assets can sometimes be very valuable, albeit difficult to price.
In other words, the net asset value calculation usually results in a number that is too low for the value of your company, especially if your company is profitable. A valuation based solely on net asset value is best suited for a company that is making a loss or closing down operations.
The investment value is based on an estimate of how much money the company will generate in the next few years under the management of the new owner. Prepare a profit forecast that is as realistic as possible, using your company’s average profit as basis.
Use the profit and loss accounts for the past three years, adjusted to your company’s normal situation. As a result, the investment value better reflects the actual situation than using the official profit and loss accounts. Finally, use the profit and loss accounts to convert your estimation of the income to present value. The result is the calculated investment value of your company.
Further determining the investment value requires other information as well. It is influenced by factors such as market development in the next few years, how the company will support the business of its new owner and how the new owner will develop the company. You can take these factors into account already when you are converting your estimated income to the present value.
Investment value can also be used to determine your company’s purchase price: the buyer should be able to make back the purchase price from the company’s profits within two to five years.
If your company is small and its balance sheet total is average for the industry, you can also use EBITDA to determine your company’s value. EBITDA is the amount of money that your company is left with when it has paid all its business expenses.
When you use EBITDA to determine the value of your company, you should first calculate your company’s average EBITDA over the last three years. In the calculation, use financial statements adjusted to your company’s normal situation. Then multiply the average EBITDA by 3 to 5. The size of the coefficient is impacted by factors such as your company’s industry, future prospects and how evenly it turns out a profit.
The calculation will produce a rough estimate of your company’s value. Note that although the calculation is influenced by estimates of the future, it is based on exiting figures. The assumption is that your company will continue to turn out a fairly similar profit as before.