What gives a company value
Six methods you can use to calculate company value
As a rule, you only concern yourself with the “value” of your company if you are thinking of handing it over to a successor or if you want to sell your company.
The value of your company is also a reflection of your creditworthiness.
Only a company that has a high value also has a good credit rating, which in turn leads to a favorable rating and favorable credit terms.
From this point of view, it is important for you to know the value of your company so that you can argue with your bank.
The company value shows the arithmetical value of your company's equity and the price an investor might be willing to pay for your company's share capital. The actually achievable purchase price will, however, depend on supply and demand.
There are several methods available to you to determine the company value. These are mainly the following:
You use the net asset value method to determine your net worth
In the net asset value method, the assets required for the business are valued at replacement prices.
The non-operational assets are added to the liquidation values and reduced by the amount of the liabilities. The so-called net worth is determined.
The liquidation procedure for valuing unprofitable companies
This method is used in particular to evaluate unprofitable companies.
The liquidation procedure is based on the breaking up of the company and represents the value that results from the sale of the asset items after deducting the liabilities and the liquidation costs. There at
- Net asset value method
- Liquidation value method
- Capitalized earnings method
- DCF method (discounted cash flow)
- Stuttgart process
- Practitioner procedure.
A liquidation usually only achieves low prices, it should be a minimum value.
The discounted earnings method evaluates future income
In the income approach, the company's future earnings are valued. Positions such as good management, customer base or goodwill are included in the assessment of the company's success as a whole.
The discounted earnings method is a common method used in Germany to determine company value.
The discounted cash flow method (DCF method) for excess payments
With the DCF method, the future payment surpluses are used instead of the future income.
With both methods (capitalized earnings method and DCF method), the values determined are capitalized and, if future income / surpluses are involved, discounted to the valuation date.
The problem with both methods lies in the choice of the “right” period and the choice of the “right” level of the capitalization interest rate. The DCF method is an internationally common method for determining company value.
You can read more about the DCF method here: "Determining company value: The DCF method"
The Stuttgart procedure for determining capital gains
The so-called Stuttgart process is a combination process between income and net asset value, which is usually used by the tax authorities to determine capital gains.
And the simplest method: the practitioner method
In this process, the last annual profit is multiplied by an industry-related rate.
The following industries can be used as profit multipliers:
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