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Company valuation in the succession process
When implementing a succession plan, sooner or later the value of the company must be determined as the basis for setting the price. Due to the often different value perceptions of buyer and seller, the method to be applied and the determination of the underlying parameters are of particular importance. Regardless of whether the sale of the business is conducted internally within the family or with a third party, carrying out a methodical valuation is highly recommended in both cases.
Evaluation process
The assessment process can be divided into the following process steps:
Method selection The different methods can lead to different results. An appropriate mix of methods that takes into account the characteristics of the company to be valued leads to usable values that are close to the market.
Adjustment The annual financial statements under commercial law are usually optimised for tax purposes and do not show the effective earning power and substance of the company. The annual accounts on which the valuation is based must therefore be adjusted from the point of view of business management considerations. One-time special effects and recognisable future changes in the market must also be included in the adjustment.
Valuation The method mix of net asset value, capitalised earnings value, practitioner's method and DCF method determined in the context of the choice of method as well as the consideration of the effective market value method lead to a meaningful valuation result.
Interpretation The results must be subjected to an assessment and plausibility check. Value-driving factors, such as in particular the composition of the applied cost of capital rate, must be known in order to interpret the valuation results.
Final report The valuation results must be summarised in a suitable, recipient-oriented report form and the assumptions made must be documented. Due to the often differing value perceptions of buyer and seller, the undertaking of a methodical valuation is highly recommended.
Valuation methods
In theory, the following valuation methods are used to determine value:
Net asset value method The net asset value method considers only the net asset value, which consists of the valued assets less the valued liabilities on the defined reporting date. Factors such as potential, future earnings, existing partnerships with customers and suppliers and the company's internal know-how are not taken into account.
Capitalised earnings value method The capitalised earnings value method looks exclusively at the earning power of the company. It is a forward-looking approach based on the projected income streams of the next two to five years.
Practitioner's method The practitioner's method is a combination of the two aforementioned methods, which combines the substance and the earning power. In the practitioner method, the two underlying methods are weighted differently. In many cases the weighting is 2:1 (earnings value double, net asset value single).
Discounted cash flow method (DCF method) In the DCF method, the future earnings value is forecast on the basis of the free cash flow (FCF) after tax. It shows what income the buyer can expect in the future. After deriving the FCF method, these are discounted to the valuation date. The mandatory prerequisite for this method, which is often considered the best, is a qualitatively good medium-term plan of the company.
Effective market value method for determining value
The values determined by the above-mentioned methods, which are mainly based on purely financial figures, are of no use if the seller cannot find a buyer on the market who is willing to pay this value as a price. In order to check the plausibility of the values determined, a comparison with the transaction prices actually realised in the case of company sales is indispensable.
Conclusion
In the course of their many years of work, our auditors have assisted with numerous succession arrangements in the SME segment and, in particular, have built up a high level of expertise and practical competence in the topic of "business valuation", which ensures comprehensive, tailor-made and well-founded support in your succession process.
This article has already been published in CORE-Newsletter 31 of June 2022.
