When buying or selling a company, an idea of the value is very important. Several methods are available for the company valuation of a business (or activity). Whether using simple quick valuation or extensive valuation methods.
The essence of today’s valuation methods is the assumption of future cash flows. This is also called the discounted cash flow method (DCF method). This estimate of future cash flows is a process that is carried out in close communication with the entrepreneur. By assuming cash flows instead of profit (which is more influenceable), the company’s earning capacity can be clearly visualised.
Each company has a risk profile consisting of two points of view: the entrepreneur’s and the potential buyer’s. This risk profile consists of, among other things, a weighing up of questions such as: is the company dependent on the entrepreneur, on large customers or on specific personnel? What growth phase is the company in? All these components are important for determining the risk profile and hence the return requirement.
We calculate the economic value by discouting the future cash flows to today based on the aforementioned return requirement. This kind of company valuation is only “tenable” to a limited extent and must be periodically updated if it is being used as a steering mechanism.
Because value is not the same thing as price, a company valuation can provide a starting point for conducting negotiations, but also for a company analysis which enables the profit-generating parts of a company to be identified.
Would you like to know more about company valuation? Are you interested in the value of an organisation that you have in mind? Then please contact us for a no-obligation consultation.