The Top 4 Valuation Methods for Companies in 2025 (with Examples)
The four most important methods for calculating the enterprise value for small and medium-sized companies are the multiple method, the net asset value method, the capitalized earnings value method and the DCF method. Here’s what you need to know about each method. Simply explained and with examples.
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The multiple method
To the overview of our current market data on valuation multiples.
Valuation = basic key figure multiplied by the valuation multiple
The multiple method (also known as the “multiplier method”) is a method frequently used in the field of mergers and acquisitions. The method allows a quick check of whether an asking price for the sale of a company is realistic and appropriate on both the buyer and seller side.
This is based on the prices currently achieved by comparable companies that have already been sold. One examines for what multiple (“multiple”, “multiplier”) these companies were sold and applies this factor to the company to be valued. Multiples can, for example, be multiples of operating profit (“EBIT multiple”), earnings before interest, taxes, depreciation and amortization (EBITDA multiple) or sales (“sales multiple”).
The method is primarily suitable for companies that have been in existence for some time. Here, a multi-year profit trend can be used as a basis for valuation. The better the empirical values, the more meaningful the result will be. In any case, it is advisable to use the multiple method in addition to the plausibility check of a company value that has resulted from another method.
The indicative value of the company determined with the multiple corresponds to the “enterprise value”. This is the value of equity plus financial debt. This means that for the value of the equity, the financial liabilities must be deducted from the calculated enterprise value.
Valuation using the EBIT multiple method
When valuing the company using the EBIT multiple method, the average net income before interest and taxes (“EBIT”) of the last few years is multiplied by the EBIT multiple. Earnings before interest and taxes are taken into account so that the multiples remain comparable even for companies with different tax rates and debt capital structures. For smaller companies with sales of up to 20 million, the observed range for multiples is mainly in the 4 – 10 range. A multiple of 6 or higher indicates a high attractiveness of the company. Where within the range the company is located depends on various numerous “soft factors” in addition to the numbers.
NIMBO uses EBITC multiples for business valuation
This is based on EBIT plus total executive compensation (gross salary, employer contributions to social security, car expenses).
In smaller companies, the managing director can determine his own salary within certain limits. The “EBITC” allows a comparison with the profitability of other companies without distortions due to wages above or below the market wage, peculiarities in capital structures and different tax rates. In the EBIT variant, an adjustment of the CEO wage is also made, but NIMBO prefers the EBITC variant because, from an empirical point of view, it can explain observed purchase offers better than the EBIT variant.
Valuation using the EBITDA multiple method
In contrast to EBIT, EBITDA (earnings before interest, taxes, depreciation and amortization) does not include depreciation and amortization. For the same EBIT, the EBITDA of an asset-intensive company can be significantly higher than that of a personnel-intensive one.
In the case of asset-intensive companies with a high net asset value, it makes sense from a buyer’s point of view to work with EBITDA multiples, as the level of depreciation allows a certain amount of leeway, which can distort the result. The phase of the investment cycle in which the company currently finds itself should also always be taken into consideration. Are there any investments to be made?
Valuation with sales multiples
From an investor’s point of view, the potential profit of a company is of particular interest. However, if the current profit is not meaningful, very small or even negative, another ratio, such as sales, should be considered. This may make sense, for example, if the purchaser believes in improving the return on sales with its own existing, more efficient cost structures. The potential buyer takes a greater risk with this method and must believe that the company will make a profit in the future.
A sales multiple valuation can also be used as a supplement or to check the plausibility of other valuations.
Sales multiples are significantly smaller than EBIT multiples. The observed range is mostly between 0.2 and 2, depending on the industry, profitability, growth prospects and some other factors. For low-growth and low- or non-profitable companies, sales multiples between 0.2-0.6 are realistic. Depending on the amount of sales, even a change in the sales multiple by a factor of 0.1 can have a major impact on the company value.
If one performs a valuation with both EBIT and sales multiples, and if the valuation with the sales multiple results in a higher value than the valuation with the EBIT multiple, this indicates a lower return on sales than for comparable companies.
Example Multiplier Method
Example assumptions:
EBIT: €1,000,000
Typical industry multiple: 4-7
Assumed multiple (because the company is doing better than average): 6
Bank loan: €1,000,000
Higher than usual inventory: €500,000
Calculation of the Company Value:
Step 1: Calculation of the Enterprise Value (EV)
Enterprise Value = EBIT × Multiple
EV = €1,000,000 × 6 = €6,000,000
Step 2: Calculation of the Equity Value
Equity Value = Enterprise Value – Net Debt
Net debt = Bank loans – Excess inventory
Net debt = €1,000,000 – €500,000 = €500,000
Equity Value = €6,000,000 – €500,000 = €5,500,000
The enterprise value is: €6,000,000
The equity value is: €5,500,000
Advantages and disadvantages of the multiplier method:
The net asset value method
Valuation = net asset value of the company
This is the simplest method of determining the asset value.
One adds the values for fixed and current assets at market prices from the balance sheet, adjusts them for hidden reserves and deducts taxes, debts and liabilities.
The asset value method shows a rather low company value.
In the event that the net asset value does not yield a return commensurate with the risk or the company even makes a loss, the financial enterprise value – excluding any value-enhancing compound effects with a possible buyer – is basically equal to the liquidation value.
In connection with the sale of a company, the net asset value has primarily an informational value and is generally below the valuation range of the multiple methods, since no goodwill and earnings potential above the minimum return are represented.
Advantages and Disadvantages of this Method
Using the asset value method as a supplement, for example in combination with a more optimistic method, such as the earnings value method, (see section on mean value methods), can be quite useful.
It quantifies the current value of the company’s existing assets and shows the actual amount of equity. This is of importance for a financing.
Example Asset Value Method
Example assumptions:
Value of fixed and current assets (at market prices): €1,000,000
Liabilities/debts: €500,000
Provisions: €100,000
Reversal of economically unnecessary provisions: €100,000
Calculation of the Asset Value:
Step 1: Adjustment of the provisions
Economically unnecessary provisions are reversed:
Effective provisions = Provisions – unnecessary provisions
Effective provisions = €100,000 – €100,000 = €0
Step 2: Asset value = Assets – Liabilities – effective provisions
Asset value = €1,000,000 – €500,000 – €0
Asset value = €500,000
The asset value of the company is: €500,000
Significance of the net asset value method
The net asset value method plays only a subordinate role today. The advantages are clearly the simple application and the good traceability of the result. A negative aspect is the low informative value for many companies, as intangible values and future developments are not taken into account.
Simplified capitalized earnings method
valuation = revenue divided by capitalization rate
In a business valuation using the capitalized earnings method, the company is viewed as an investment that generates constant returns. These constant returns are valued using the financial mathematical formula of a perpetual annual income stream. The average expected sustainable after-tax profits over the next three to five years are divided by a risk-adjusted interest rate (“capitalization rate”). The value determined in this way results in the value of the equity (so-called “equity value”).
Since the capitalised earnings value method is based on forecasts, the underlying values should be as realistic as possible. The result should also be checked for sensitivity to changes in assumptions (e.g. lower/higher earnings and interest rates). The question always arises as to what extent the existing earning power of the valued company can be transferred to the buyer in the event of a sale.
Machinery or stocks of goods necessary for normal operations are already included in this calculation, as they are a prerequisite for achieving the sustainable yield on which the valuation is based.
Calculation of the capitalisation rate
Capitalisation rate = base rate plus market risk premium plus company-specific risk premium
The capitalisation rate is made up of three factors.
The base rate, or risk-free rate. It is usually the interest rate on government bonds with a maturity of 10 or thirty years. At the end of 2021, the prime rate in Germany was a rounded 0.10%.
The market risk premium, which reflects the entrepreneurial risk in the industry and country concerned.
The company-specific risk premium, which evaluates the specific business risks of the company.
For example, for the valuation of a craft business, an interest rate of around 20 % is usually realistic due to the often higher dependence on the owner. This was empirically proven by real purchase prices.
Factors for determining the risk premium
Fungibility: The company can be turned into money quickly, safely and without high costs. This is generally not the case for unlisted companies.
Role of the company owner: The company is very dependent on the company owner. All decisions and contacts are focused on him.
Company strategy: There is no comprehensible short-, medium- and long-term strategy.
Competition: Compet itive pressure is high, and as a small company with a small market share, there is an increased risk of margin pressure or even being squeezed out of the market.
Customer structure: A large proportion of sales is made with a small number of customers. There are hardly any switching hurdles for customers. The customers have aged along with the owner and will not be around for the foreseeable future.
Supplier structure: There may be supply bottlenecks or delays in production due to dependence on individual suppliers and there are no alternative options.
Management: insufficiently qualified and/or experienced. There is a risk that it will leave the company after a change of ownership.
Employees: The level of education of the employees is rather low. Suitable skilled workers are difficult to find on the labour market, which has a negative impact on future growth. There is a dependence on some key people who are not easily replaced.
Non-recurring revenues: Revenues are primarily generated from non-recurring customers.
Example Simplified Earnings Value Method
Example assumptions:
Sustainable earnings (Ø of the adjusted profits of the last 3 years): €1,000,000
Applied base interest rate (risk-free interest rate): 2%
Market risk premium (market premium for the industry): 8%
Company-specific risk premium (above-average risk due to dependence on the owner and the company size): 10%
Question from the buyer’s perspective:
How much money would the buyer have to invest in an alternative investment with the same risk to achieve a return of €1,000,000?
Calculation of the capitalization rate:
Step 1: Capitalization rate = Base interest rate + Market risk premium + company-specific risk premium
Capitalization rate = 2% + 8% + 10%
Capitalization rate = 20%
Calculation of the company value (earnings value):
Earnings value = Sustainable earnings / Capitalization rate
Earnings value = €1,000,000 / 0.20 = €5,000,000
The capitalization rate is: 20%
The company value is: €5,000,000
Advantages and Disadvantages of this Method
Significance of the capitalised earnings method in Germany
In Germany, the capitalised earnings method is the most widely used method (IDW S 1). It is the valuation procedure prescribed by law for business valuations for inheritance and gift tax purposes. The capitalized earnings value method is applied accordingly by the tax authorities and finds high acceptance in court disputes.
The Arbeitsgemeinschaft der Wert ermitteln Betriebsberater im Handwerk (Working Group of Valuation Consultants in the Skilled Trades) has developed the AWH standard for the valuation small and medium-sized skilled trades businesses. It is also based on the capitalized earnings method and is adapted accordingly to the special features of these companies. For more information on valuation according to the AWH standard, please contact ZdH.
The discounted cash flow (DCF) method
This method has its origins in classical investment appraisal. Internationally, this is the valuation method with the highest degree of recognition.
Theoretically, the DCF method yields the most accurate enterprise value. The crux, however, is the need to project detailed future earnings or cash flows and the corresponding risk-adjusted interest rates (costing rate) to discount them to their present value.
The advantage over the capitalised earnings value method is the high degree of flexibility, since it is not necessary to assume only one “sustainable earnings”, but it is possible, for example, to forecast the course of the earnings situation separately for each of the next 5 years. However, this also increases the complexity and the need for explanation of the evaluation.
The DCF method is more suitable for valuing large companies. The starting point is always a business plan for the next 5-7 years. This method tends to result in higher company values.
In contrast to the capitalized earnings method, which takes future earnings as its starting point, this method looks at cash flows.
A distinction is made between the gross or entity method and the net or equity method. In practice, the majority of companies use the entity method, which is used to determine the enterprise value, i.e. the value of the company including financial liabilities.
The free cash flow of the company, including interest on borrowed capital, is discounted to the present day using the weighted average cost of capital of the financial resources tied up in the company. The calculation of the net present value is primarily intended to reflect the operating potential of a company.
As far as possible, an entire investment cycle should be considered, as investments in current and fixed assets have a significant impact on cash flows.
The forecast of cash flows and the choice of discount factors are adjusting screws with which results can be moved in the desired direction. In order to guarantee the reliability of the results, a sensitivity analysis that shows the influence of changes in the assumptions on the company value is essential.
In principle, the choice between the DCF method and the capitalised earnings method has no influence on the valuation result if the premises are the same. The decision in favour of one of the valuation methods should therefore depend on the target group and the purpose of the valuation.
Example Discounted Cash Flow (DCF) Method
Free Cash Flow (FCF) for Forecast of the Next 3 Years
| Forecast Year 1 | Forecast Year 2 | Forecast Year 3 | |
|---|---|---|---|
| Free Cash Flow (FCF) | 300,000 | 330,000 | 360,000 |
Calculation of the Discounted Cash Flows and Terminal Value
Discount rate (r) = 10%
Terminal growth rate (g) = 2%
DCF1 = FCF1 (1 + r)1 = 300,000 1.10 = 272,727
DCF2 = FCF2 (1 + r)2 = 330,000 (1.10)2 = 330,000 1.21 = 272,727
DCF3 = FCF3 (1 + r)3 = 360,000 (1.10)3 = 360,000 1.33 = 270,676
Calculation of the Terminal Value (TV)
The terminal value is calculated as:
TV = FCF3 × (1 + g) r – g = 360,000 × 1.02 0.10 – 0.02 = 4,590,000
The terminal value is then also discounted:
DCFTV = 4,590,000 (1 + r)3 = 4,590,000 1.33 = 3,451,128
Total Enterprise Value (EV)
EV = Sum of DCF + DCFTV = 272,727 + 272,727 + 270,676 + 3,451,128 = 4,267,258
Calculation of the Equity Value
The equity value is calculated by subtracting net debt from the enterprise value:
Equity value = EV – Debt + Cash
Assuming the company has 500,000 in debt and 200,000 in cash:
Equity value = 4,267,258 – 500,000 + 200,000 = 3,967,258
The equity value is therefore 3,967,258.
Advantages and Disadvantages of this Method
Various averaging methods / mixing methods
Due to the estimation of values, the capitalised earnings value method is associated with uncertainties. The combination methods also include the substance of the company in their valuation.
The idea behind mean value methods is to include both past and future expectations and risks. This leads to a high level of acceptance, also and especially among companies in the SME sector. Commercial and craft enterprises and companies from the manufacturing industry use it for planned transactions, but it is also frequently used for family-internal succession arrangements.
The result is based on the weighted average of net asset value and capitalised earnings value. Weighted usually means that twice the income value is added to the net asset value. The result divided by three and increased by the non-operating assets gives the enterprise value. However, alternative methods are also used in which the shares of substance and income in the total value are weighted differently.
The mean value method or Berlin method
In the mean value or Berlin method, the arithmetic mean of the income and asset value is calculated. It is based on the idea that companies with low substance and high earnings are typically exposed to high competitive pressure, which will foreseeably reduce these earnings in the future.
Valuation = (capitalised earnings value + net asset value) / 2
The Vienna procedure
The Vienna method also calculates the arithmetic mean of the income and asset values. However, the calculation of these two values differs, for example, from the Berlin method.
The lump-sum approach to the most difficult factors to determine makes the Vienna procedure a simplified procedure. The capitalization rate is set at nine percent. The uncertain forecast of future earnings is circumvented by taking the average of the last three financial years. The Vienna procedure is often used as an alternative procedure when the parties could not agree on other valuation methods.
Valuation = (capitalised earnings value + net asset value) / 2
The excess profit method
The excess profit method is another mean value method and is based on the assumption that the profit in the long term only corresponds to an appropriate return on net asset value.
As a consequence of the consideration that higher profit margins recede over time, excess profits that exceed the normal rate of return are capitalized at a higher rate of interest. Factors that may be responsible for a decline in profits include a worsening economy, increased competition, or the like.
Example Calculation Excess Profit Method
Example assumptions:
Two things need to be established for the valuation:
1. Amount of the interest rate with which the asset value is sustainably accrued (“normal interest”).
2. Number of years for which the excess profit should apply, which is added to the asset value.
The interest on the net asset value tied up in the company at replacement prices at the normal interest rate is deducted from the effective profit. This “excess profit” exceeding the normal interest rate is added to the asset value over a certain number of years. As a rule, a period of 3-8 years is used.
Rating
= net asset value + present value of excess profits
= net asset value + number of years with excess profit x (profit – (normal interest rate x net asset value))
= Numerical example: 1,000,000 + 3 x (200,000 – (10% x 1,000,000)) = 1,300,000
The Swiss Method or the Practitioner Method
The practitioner method is easy to understand and follow and is often considered the first point of reference on both the buyer and seller side.
For successful companies, the practitioner method results in very conservative, low values for the company.
The Swiss tax administration also uses this valuation method. It calculates with a capitalization rate of 9.5%.
Valuation = 2/3 x income value + 1/3 net asset value
The Stuttgart procedure
Under the Stuttgart method, the value of a company is the sum of its net asset value and its capitalized earnings value. This procedure was primarily used to determine the company value of unlisted companies in the event of inheritance or donations. As this procedure is no longer up to date, it was abolished in 2009.
Special cases
Special Case: Low Earnings with a Lot of Substance
The Schnettler method deals with the special case of low-income or unprofitable companies with a high net asset value that do not pay an appropriate return on the net asset value. It is my mixed method of asset value and income value.
The depreciation of the high level of property, plant and equipment results in accounting losses. A buyer would carry the property, plant and equipment at reduced replacement cost, reducing depreciation and increasing the capitalized earnings value accordingly.
Frequently asked questions
What is the best method for business valuation?
Depending on the valuationand the phase the company is in, one or the other method may be more appropriate. We recommend going through several methods to get a feel for what range the value is within. Nimbo works with the multiple method.
How does the Multiple Method work?
This method requires recently achieved prices from comparable companies as a basis for calculation. One examines for what multiple (“multiple”, “multiplier”) these companies were sold and applies this factor to the company to be valued. Multiples can, for example, be multiples of operating profit (“EBIT multiple”), earnings before interest, taxes, depreciation and amortization (EBITDA multiple) or sales (“sales multiple”).
Which method is used to evaluate a start-up?
With a start-up that is not yet making a profit and is growing strongly, you are valuing a promise for the future. The DCF method can be applied to business plans of start-ups. The discount rate used for this purpose is derived from the investors’ expected return.
For whom is the multiple method (multiplier method) suitable?
This method is primarily suitable for profitable companies that have been in existence for some time. Here, a multi-year profit trend can be used as a basis for valuation. The more stable the empirical values, the more meaningful the result. This method is not suitable for companies that are making losses or are in a strong growth phase.
