Business Valuation

Are you looking for a consultant who will partner with you and conduct sound theory-based business valuations? Then you are right here. If a company is valued, uncertainty can either be compressed or unveiled. I simulate the company and its environment on thousands of possible paths. This allows getting a clear picture. Chances and risks are displayed as transparently as possible.

Business valuation is often summarised under the term Mergers and Acquisitions (M&A), but these are only two of four basic forms. It is subdivided into acquisition, sale, merger, and demerger. In whichever of these situations you might find yourself, I will support you during your transaction as an advisor. Speaking 14 languages, I can partner with you, especially in an international context. If you want to find out more about me, consider reading the section “About me”.

Brief Appraisal

Receive a condensed business valuation in accordance with recognised standards (IDW S 1) and methods (capitalised earnings method, DCF methods, functional business valuation).

Through a business valuation, the company value is calculated, which, in a nutshell, reflects the benefit of the future cash flows to the shareholders. The most important company value in a business valuation is the decision value, which marks the limit to the advantageousness.

The calculation is performed using a mathematical procedure (Operations Research). The decision value, which is calculated from the cash flow to the owner, can be understood as the maximum purchase price (acquisition), as the minimum sale price (sale), or as the marginal quota (merger, demerger). This value is always individual. It depends on your financial situation. Your credit conditions, your tax situation, and your withdrawal preferences count.

From the decision values of two parties, an impartial appraiser can calculate an arbitration value (umpire value) if there is an overlap. In addition to these two values, there is also the argumentation value, which is used to try to influence the counterparty. This classification corresponds to the perspective of functional business valuation.

The functional business valuation is a method of business valuation and is used to determine the company value, which is referred to as the decision value. The cash flow is discounted using so-called endogenous marginal interest rates, which depend on the individual conditions of the valuation subject.

Functional business valuation is based on three main functions: the decision function, the mediation function, and the argumentation function. These are each linked to the decision value, arbitration value (umpire value), and the argumentation value. The decision function is used to find a value that is just acceptable, i.e., not disadvantageous.

The second function (mediation function) is important for finding a compromise between different parties. The decision values of the parties serve as a starting point for a fair compromise in price determination.

The argumentation function is necessary for negotiation purposes. Argumentation values are calculated to influence the other party.

When determining the decision value, your situation must be taken into account, i.e., your tax situation, your credit conditions, and your withdrawal preferences count.

The decision value is calculated through (non-)linear optimisation. You can imagine this as a kind of complete financial plan or spreadsheet that takes all cash flows and their tax effects into account. In contrast to a complete financial plan, (non-)linear optimisation can model all dependencies. In short, your entire financial planning is optimised down to the last cent.

Discounted-Cash-Flow (DCF) is a generic term for various methods (APV, WACC, FTE) of business valuation. In summary, the future cash flow (profit distributions) to the owners is discounted adjusted for risk and presented as the company value.

The methods/approaches are based on the equilibrium theory of Modigliani and Miller (1958) and a model called CAPM (Sharpe, 1964; Lintner, 1965; Mossin, 1966), or corresponding extensions. Three of these approaches should be mentioned:

• Adjusted Present Value (APV)
• Weighted Average Cost of Capital (WACC)
• Equity (FTE)

The Adjusted Present Value (APV) approach is a gross approach. In this, the total company value consists of the base present value, the value of debt, and the value of the tax shield. Debt is tax-advantaged compared to equity. The cash flow to the owners is discounted with the cost of equity (of the unleveraged company) to the base present value, and the cash flow to the debt providers is discounted with the cost of debt to the value of the debt. Similarly, the tax benefit is discounted with the cost of debt to the value of the tax shield. If the value of the debt is subtracted from the sum of the base present value and the value of the tax shield, the value of the equity is obtained. Subsequently, the cost of equity of the leveraged company can be calculated.

In practice, the return on equity is calculated using the CAPM model (or an extension), although this is actually not compatible with the equilibrium theory of Modigliani and Miller (1958) in terms of basic assumptions (Hering, 2021).

The Weighted Average Cost of Capital (WACC) approach is a gross approach. The free cash flow is discounted with the average cost of capital. This is composed of the cost of equity (of the leveraged company) and the cost of debt. The cost of capital rates are weighted according to the ratio of equity or debt and the tax shield to total capital. Again, in practice, the cost of equity is derived from the CAPM model. The interest rate consists of the base interest rate and the risk premium (beta factor).

The Equity Approach (FTE) is a net approach. The free cash flow is discounted with the cost of equity (of the leveraged company).

All three models can be converted into each other, provided the cost of equity is estimated consistently.

Explanations of the DCF method can be found here.