In the context of succession planning the withdrawing entrepreneur is frequently facing the question of the valuation of his company. The company´s evaluation is determined by the concept of the handover. If for example a donation is a possibility, the valuation is influenced by applicable inheritance and gift legislation. Should a partial or full sale of the shares in the company be planned, the evaluation is the basis for the intended sales price. In this case, common valuation methods will be used. The following procedures are generally accepted and usually applied:

  • Income approach/ Discounted Cash flow method (DCF method)
  • Multiple-based evaluation method

The first two are so-called future success methods which means that the value of a company is derived from its future cash flows. Those forecasted cash flows are discounted to the evaluation day with a suitable interest rate and therefor the company value is calculated as present value. Der past success of the company does not influence its current value directly, but rather builds the basis to determine the future potential.  While the income approach calculates a present value from cash flows accrued to the company´s owners, the DCF method derives the company value through discounting its free cash flows – as if the company was debt-free. The free cash flows are available payment flows which may be attributed to equity or debt investors. Therefor to derive the company value which is attributable to the owner, financial liabilities have to be deducted.

In the framework of the multiple based evaluation method, the company value is derived either from the market price of suitable listed companies or from prices paid during comparable transactions. The company value is the product of a multiplier derived from comparable companies times the respective key figure of the company to be evaluated. Possible reference figures are turnover, EBITDA, EBIT or annual profit. If for example it can be derived from other transactions that in a certain industry sector turnover times 1,2 is the average sales price, this factor can be applied to the turnover of the evaluated company to get to an overall company value. Nevertheless when working with multiples, net financial liabilities have to be deducted to come to the value attributable to the owner. Multiples for different industry sectors in Germany are published monthly by the Finance-Magazin.