The value of your business is determined by many different factors. In each individual case, it is important to choose the right approach from a range of admissible valuation methods. We are happy to advise you and support you using a valuation method that best suits your business.
The valuation is based on the earnings (or cash flow) a company is currently able to generate or will be able to generate in future. For this purpose, a forecast for the next few years is needed. To calculate the value of a business enterprise that most closely approximates the market value, the forecast is made on the assumption of a going concern and duly takes into account current market opportunities and market risks.
The present value is calculated by means of an annuity calculation using the earnings or the cash flow generated on a discounted basis. Haircuts or potential proceeds from the disposal of assets not required for operational purposes are taken into account, for example.
Income approach and discounted cash flow method
The most widely used valuation methods are: the income approach and the discounted cash flow method (DCF). When using these methods to establish the value a business, only the financial situation is assessed.
The focus is on the future. Future surpluses (profits) are calculated and discounted to determine the present value. Ultimately, the two procedures should deliver the same total value (provided the same assumptions are made). The main question is: 'Should the money be invested in the business or deployed in alternative capital investments (without any risk). The yield of a long-term government bond could serve as the starting point, for example. Both premiums and discounts need to be taken into account to specifically establish the equivalence of the alternative investment in terms of risk, purchasing power and availability. Futures profits/cash flows must be discounted so that the present value is established. The interest rate takes into account specific risks.
The income approach values the calculated future profit whereas the DAC method estimates the calculated, future cash flow.
The income approach determines the value of the business as the present value of future streams of cash flow. Therefore, a profit and loss forecast must be prepared. The resulting future net incomes are discounted.
The discounted cash flow method is usually used to value public interest corporations. In the valuation, future cash flows are capitalised. The cash flow is the excess of operating income over operating expenses. The future cash flow is estimated. The net (equity) method is distinguished from the gross (entity) method.
The gross method takes into account the present value of all incoming cash flows less the present value of all interest-bearing debt capital. The net method does not consider total cash flow, but only payments to equity providers (e.g. dividends, withdrawals, capital repayments).