There are various methods of business valuation. The choice of method depends primarily on the field of business of the company in question, its size and the reason for which a valuation is required (e. g. acquisition and sale of companies or shares in companies, registration or resignation of shareholders, changes of legal form).
Roughly, a distinction can be made between two main methods (and their combination). The decision which method is applied depends on the field of business, the size of the company and the reason for the valuation.
1. Capitalized-value method: The future withdrawable financial surplus of the company.
This approach plays the most important role in the valuation of
companies. The value of the company is defined by the company's ability to
generate withdrawable cash flow for its owners.
The company's value is consequently generally defined by the capital value
of the cash flow accrued in the future, generated by the company's
continued performance, plus the value of the non-operating assets.
The capital value has to be determined on the basis of the capitalization
interest rate, which corresponds to the yield of an equivalent alternative
investment. The basis for comparison is the yield of long-term government
bonds. In order to render the alternative investment equivalent to the
valuated company with regard to risk, purchasing power and availability,
some additions and deductions are to be considered.
2. Net-asset-value method: Assets minus debts
The net asset value is generally to be understood as the difference between the company's operative assets - adjusted for the hidden reserves and the hidden liabilities - and the debts.
The net asset value generally does not have an importance of its own in business valuation. The net assets of a company are important for the future performance of a company for the following reason: The assets of the company to be valuated form a substantial basis for its future earning potential. The assets given on the valuation key date will lead, when used expediently, to future earnings or to a decrease of future expenditure.
The net asset value on its own is of importance only with regard to capital- (asset-) intensive manufacturing companies and to such companies that hold greater-than-average assets (for example real estate companies).
3. Combination of capitalized-value method and net-asset-value method
Combination of capitalized-value method and net-asset-value method The net asset value and the capital value are partly added up and then weighted in a fashion that is oriented on the type of company.
