A question of interpretation?

Company valuation: A question of interpretation?

A company valuation provides you with important insights, not only for assessing your company's current position, but also with regard to selling your company.

A company valuation not only provides you with important insights and decision-making tools for assessing the company's current position, but also plays a crucial role when you are selling your company. What do you need to consider when obtaining a valuation?

A market-consistent valuation of a company is a challenging task to undertake and is dependent on numerous factors. It is based on a standardisation of the figures, a comprehensible plan for the coming years and sensible application of the various recognised methods. It is not about finding the absolutely correct value because company values are not purely objective, but are more likely to be based on subjectively determined assumptions and perceptions. Thus a distinction can be made between the theoretical value and the achievable price of a company.

The theoretical company value can be calculated by means of various methods, which can generally be divided into net asset value methods and capitalised earnings methods. With the net asset value method, the company value consists of the assets minus the debts. The capital earning methods assess a company based on the revenue streams that the company expects to generate in the future using the existing capital. The results are particularly meaningful when they are validated through use of the market value method, which is based on observed company transactions. This validation based on empirical values makes it possible to approximate the market value. Each method ultimately provides different values – without an expert interpretation of the individual results and knowledge concerning prices actually achieved, a valuation has little meaning.

In practice, the theoretical company value does not always correspond to the achievable selling price. The market value can only be determined when a company is actually sold. In order to determine if the theoretically calculated value is in line with the market, the company must be actively marketed and a demand generated. In the process, the market response is determined by a variety of factors, such as the current business climate, the market position and the future potential. At the same time, cluster risks, a high level of owner dependence and time pressure can have a negative effect on the achievable price. Aside from the objective parameters, the subjective assessment by potential buyers plays a significant role. This can be foreseen beforehand only to a limited extent and is the result of the market response. Because it is only when a company is widely marketed and several offers are received that it is possible for a market price to be achieved.

Whether a company valuation is carried out in order to assess the company's position or as part of a succession plan, the involvement of an expert can make all the difference. Over-inflated prices can make the selling process considerably more difficult. An experienced consultant is in a position to not only determine the theoretical value of a company but also to make specific price recommendations based on observed transactions.

Obtain detailed information about the different valuation methods.

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