Company valuation: methods and what affects value

The question of how much a company is worth comes up on a sale, when an investor comes in, on inheritance and when settling up with shareholders. Company valuation is not a single number, however, but an estimate that depends on the chosen method, the assumptions and the purpose of the valuation. That is why the same company can have a different value in different situations. The aim of a valuation is not to find a single indisputable number, but to arrive at a justified range that can then be negotiated.

Why companies are valued

There are several reasons: the sale or purchase of a stake, the entry of an investor, raising finance, inheritance proceedings or disputes between shareholders. The purpose matters because it influences which method and which assumptions are appropriate. A valuation for a sale may differ from a valuation for accounting purposes.

Basic approaches to valuation

In practice, three basic perspectives on value are used. Each looks at the company from a different angle, and in a specific case they may give different results.

• Asset-based approach: based on the value of the assets after deducting liabilities.
• Income approach: relies on future profits and cash flows.
• Market (comparative) approach: based on the prices of similar companies on the market.

The asset and income perspectives

The asset-based approach works well for companies with significant tangible assets. The income approach is more suitable for companies whose value lies in their ability to generate profit in the future. For businesses that are up and running, it is precisely future profitability that tends to be decisive, as the buyer pays for what the company will bring in, not just for what it owns.

What affects value

A company’s value is not made up of the figures in its financial statements alone. The stability and predictability of revenue, dependence on the owner or on key customers, the quality of the team, the contract base and the overall market position all have a major influence. A company that works even without the owner being present every day usually has a higher value.

Where differences arise

Differences between valuations are not unusual. They stem from different assumptions about the future, different perceptions of risk and what each party expects from the transaction. That is why the final price is usually negotiated within a range, not as an exact figure.

How to prepare for a valuation

The quality of a valuation stands or falls on the quality of the underlying documents. A company with orderly accounts, clear contracts and transparent relationships with customers and suppliers is easier to value and is usually valued more favourably. Conversely, ambiguities and missing documents introduce uncertainty into the valuation, which tends to reduce the value. If you are preparing for a sale or for the entry of an investor well in advance, it pays to put the company in order even before the valuation itself. Reduce dependence on a single person, adjust contractual relationships so that they are transferable, and make sure the company functions as a system, not as an extension of the owner. It is precisely this independence of the company that tends to be one of the factors buyers value most and that is reflected in a higher price.

When to bring in an expert

A sound valuation requires good accounting data and an understanding of the wider context. An accountant and an adviser will help you prepare the figures, choose a suitable method and interpret the result in the light of the purpose of the valuation. An objective basis will give you a stronger negotiating position and reduce the risk of undervaluing or overvaluing your company.

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Frequently asked questions

Which company valuation method is the right one?

There is no single universally correct method. The choice depends on the type of company and the purpose of the valuation, which is why several approaches are often combined in practice. Companies with tangible assets are valued differently from companies whose value lies in future profits.

Why do two valuations of the same company come out differently?

A valuation is an estimate based on assumptions about the future and on perceptions of risk, and these differ from one valuer to another. Different methods and the parties’ differing expectations lead to different results, which is why the final price is usually negotiated within a range.