Thomas Sonntag

Theoretical assessment vs. market value determination

Conventional mathematical finance methods used in the market such as “earnings value” and “discounted cash flow” (also in the variant “adjusted present value”) render a theoretical, mathematically inferred company value. The method however does not answer the question whether or not this value can actually be achieved in the market. Respectively, a mathematically determined value harbours considerable insecurities in terms of actual feasibility in the market and the associated probability of occurrence.

What aggravates the situation even more are the low interest rate levels, which have been prevailing for years. This artificially inflates the values resulting from the CAPM model. As a correction factor for this imbalance, besides other variables (fungibility discount), the company-specific beta is used more frequently, which already is problematic for SMEs.

The company-specific beta is inferred from the assessment of listed companies.  The transferability to SMEs has always been a principle point of criticism in terms of standard methods. Factually, the beta already is one of the main manipulators within the framework of the assessment of SMEs. If the beta is now additionally used as a correction variable for the low interest rate effect, the strength of the assessment will take on an extremely arbitrary character.

Market value

As a member of the expert committee of Finance magazine, we, together with other renowned consulting forms, determine the industry-typical EBIT and sales multipliers for the company value of SMEs.  The basis for this contribution are the company-specific multipliers, which we actually determine in the market during the course of our consulting activities.

The assessment of the company takes place directly in the market in the form of an anonymous bidding procedure. Based on anonymous actual and target figures for income statement and balance sheet (pursuant to the IDW Standard S1), the interested parties submit an offer for the company without knowing its identity. Only the industry in which the company is active is disclosed.

The finance mathematical assessment basis of the valuation can be freely chosen by the potential buyers (EBT, EBIT, EBITDA, free cash-flow or transaction volume) and is intentionally not made mandatory. Neither is the time period the assessment is based on (actual, planned or mean). As a result, the assessment bases of all conventional market methods are included in the determination of the company-specific value.

We have been working with this method very successfully for several years, which clearly differentiates itself from older methods and replaces the finance mathematical value with an actual, stable market value.