Because business owners have built their company over decades and invested their hearts and souls into it, they’re often tempted to measure value more with their emotions than with a clear logical mind.
To avoid this, calculation methods can help determine the value of a company, with the most applied being:
- Income approach: Starting point is the gross profit of the next 3 to 5 years, discounted to today’s value. A simple approach often used for small companies.
- Discounted Cash Flow method: Future cash flows are calculated and discounted to today’s value. This approach is more suitable for medium size enterprises.
- Comparative data approach: Based on transaction in the past within the same or similar industries the potential sale price is estimated. This requires access to a very large and up-to-date database to get reasonable results (e.g. CoreValueTM).
- Fixed assets method: Especially if future income is not given or unpredictable the existing assets minus the current long and short-term liabilities are the base for this calculation.
- Mean Value method: This is a mixed method which considers both, the income and the current assets. Often both a weighted with a different ratio.
- Strategic method: In some rare cases the value is based on access to patents, markets, etc. There is in principle no generic calculation for this case available.
At the end of the day, it’s important to remember that the value is driven by the market. As Publilius Syrus wrote in 1st Century BC: “Something is only worth what someone is willing to pay for it”.