Before a investor our buyer is going to take over a company, a valuation must be determined. You can value a company in different ways, but it is not always easy.
A company that has been around for several years can be appreciated in different ways. We have worked out four methods.
Discounted Cash Flow methode
The Discounted Cash Flow method is a well-known and widely used valuation method for participations and acquisitions. This method is based on forecasts of the company’s future free cash flows. These future cash flows are discounted to a current value with a discount rate. The higher the discount rate, the higher the risks of the project.
EBITDA Multiple method
The EBITDA Multiple method is based on the profit before interest charges, taxes and depreciation. The EBITDA is multiplied by a multiple that the investor and entrepreneur have agreed upon. This multiple can vary from 3 to 20 for different companies, but will generally be smaller than 10 for SMEs.
Revenue Multiple method
The Revenue Multiple method can be used, for example, when the company is loss making but has an interesting revenue development. This method is often used in addition to methods such as the EBITDA multiple method. The multiple by which the turnover is multiplied with this method often varies between 0.50 and 3 and is determined jointly by the entrepreneur and investor.
Book Value method
The Book Value method is fairly simple and is the least used of the four methods that are briefly explained in this article. Yet in some cases it is a useful method to (partly) determine the value of a company.
With this method the book value of the equity of a company is multiplied by a multiple. This multiple usually varies from 1 to 5 and is determined on the basis of sector research and valuations of comparable companies.