How much is your company worth? Tips to increase the value of your company
Mergers & Acquisitions (M&A) are an important part of the business world, especially when it comes to selling companies. In corresponding transactions, it is crucial to know the value of the company; this is the only way to ensure a fair and successful deal. In this article, we will discuss how much your company is worth and what options you must increase the value of the company.
Company valuation: How can a company value be calculated?
The value of the company can be understood independently of all sources of capital as so-called enterprise value or adjusted for all borrowed capital, as equity value.
With the help of enterprise value, investors can quantify the market value of a company. In doing so, they consider both the equity and the debt capital of the company. Liquid assets are not included in the enterprise value, as they do not represent a company value. Equity value, on the other hand, is a part of enterprise value, which is also referred to as gross enterprise value.
It is not uncommon for parties to talk past each other during initial sales discussions and mean different enterprise values. However, the purchase price is not the enterprise value, but the equity value – only this is due to the seller as equity provider. The debt portion of lending banks and cash and cash equivalents must be deducted from the sales value.
The most common methods of calculating the value of the company include:
Discounted cash flow (DCF) method:
This method looks less at the actual, present value of the company and more at its growth and value today by discounting future income. A valuation date is set in the future, from which all cash flows of the company are discounted. To determine the value of the company according to the discounted cash flow, a forecast of the expected revenues in the coming periods is required as a basis. In addition, expenses incurred, such as taxes, are added. The values determined by this calculation are regarded as the discounted cash flow or capital value.
Capitalized earnings method:
The capitalized earnings value of a company is the sum of all financial and non-financial benefits. When determining the enterprise value using the capitalized earnings value method, the present value of all future distributions is determined by discounting the financial surpluses accruing to the investor.
EBITDA or EBIT multiplier method: The value is calculated based on earnings before interest, taxes, depreciation, and if necessary, amortization, multiplied by a factor typical of the industry or company in question.
Net asset value method:
The net asset value method calculates the enterprise value based on the value of the tangible assets, i.e., the substance of the enterprise as the reproduction value or liquidation value. All assets together form the total assets. All liabilities are deducted from this gross net asset value to obtain the net asset value.
Factors influencing the value of the company
To be able to calculate the company value, some factors have to be taken into account. These include:
This area includes sales, profit margins, cash flow and debt. If sales and profitability are high, there is usually a higher value than for a company with comparatively poor financial performance.
Market and industry:
The respective market is likewise an important factor in assessing the value of a company. A booming industry can tend to increase the value of the company, while a declining market can tend to decrease the value.
Competition within the respective industry in which the company operates also has an influence. A strong competitive position is generally accompanied by fewer competitors and can therefore lead to a higher enterprise value.
Management and employees:
An experienced and successful team can also contribute to a higher company value. In addition, employee satisfaction can also have a decisive influence on the value of a company.
Intangible assets should also be considered when determining the value of a company. These can be patents, trademarks, or even intellectual property.
Tips to increase the value of the company
- Reduce dependence
- Increase customer loyalty
- Set a corporate strategy
- Invest in the company
- Retain employees for the long term
There are some ways to increase the value of the company. For example, it is advisable to reduce dependency. After all, potential buyers might ask themselves whether a change of ownership will have negative consequences, especially in the case of smaller companies where the owner often also takes over the management. What if both sales and important know-how are lost because of the sale? In this case, it might make sense to give employees more responsibility, to pass on knowledge within the company or make it freely accessible, and possibly to establish a second level of management.
Another tip: Increase customer loyalty. Make sure that prospective buyers must take as little risk as possible and that your clientele commits to your company in the long term, whether under your leadership or even after a sale.
When selling, show a perspective by defining a corporate strategy. In this way, you show potential investors the direction in which the company could develop. In many cases, there is an interest in breaking new ground in certain areas of a company to be acquired. Show that there is a corresponding potential to do so.
Another important point is to invest in the company again, if necessary, to bring it “up to scratch” and thus be able to sell it at a higher price. Are there any minor deficiencies that could be remedied? Show full commitment here once again before the sale goes ahead.
And finally, employees should also be considered. The shortage of skilled workers continues to worsen in this country. When you buy a company, you also buy the valuable know-how of its staff. It is important to retain employees in the long term and, if necessary, to invest in further training.
When it comes to M&A transactions, calculating the value of a company is an important issue. Only those who know this value can make the right decisions for the future. The different valuation methods all have their advantages and disadvantages, and there are also several options for increasing the company’s value. Professional support from an M&A consultancy can help to maximize the company value and thus ensure the success of a transaction.
Do you need help with company valuation?
Can we help you with your company valuation? Then please feel free to contact us. Our team of experts at Conpair has extensive experience in this area. We will take care of the valuation and provide you with valuable recommendations to increase the value of your company. We work closely with you to find a solution that is tailored to you.