Valuing a company – How does one determine the value of the company as a whole or of an ownership interest held in it?
When shareholdings are acquired or when a dispute arises amongst shareholders, a commonly recurring conundrum is the following:
How should the company’s value be determined?
Given the nature of the task, no single “correct” procedure or method exists.
The simplest available approach is the Net Asset Value (NAV) method. With this method, only the actually existing assets of the company are used as a basis for determining its value. An assessment of future opportunities and risks is dispensed with in this case. The company’s profitability also plays no role. The NAV method is used whenever the sole underlying objective is to acquire solely the assets of a given company. In this case, concluding a so-called “share deal” may be the most comprehensive way to cover all the assets. The company’s value would still be determined using the Net Asset Value method, however.
The Income method is used when the actual focus is on the company’s operating result and not so much on its existing assets. The calculatory basis for this method is the profit and loss statement of the company.
For large-sized companies, the Discounted Cashflow method (DCF) is the preferred way to go these days. This method computes the company’s future earnings on the basis of profit- and-loss projections. These future earnings are then discounted down to their present value while allowing for certain risk premiums. To work properly, the Discounted Cashflow method (DCF) requires a solid set of data and reliable information on the relevant markets and business lines. These data can be hard to come by for a start-up offering innovative products, since the necessary comparative data for its business line are lacking.