Understanding Business Valuation: What Is My Company Worth?
Category: Guides | Reading time: 8 minutes
Most entrepreneurs know their revenue but not their business value. Yet knowing this is the first step toward value enhancement.
Why Every Entrepreneur Should Know Their Business Value
Knowing your own business value isn't only relevant when you want to sell. It gives you an objective assessment of your position: How well does your company perform compared to others? Which areas have improvement potential? And it's the basis for strategic decisions – from growth planning to succession arrangements to equity participation for executives. Entrepreneurs who know their value make better decisions.
Common Valuation Methods for SMEs
There are various methods for business valuation, but three are particularly relevant for SMEs: The income approach calculates value based on future earnings – it answers the question 'What will the company earn in the future?'. The multiples method multiplies a metric like EBIT or revenue by an industry-standard factor. The asset-based method adds the value of all tangible and intangible assets. In practice, several methods are often combined.
EBIT Multiples: How Practical Valuation Works
The most common quick valuation for SMEs: EBIT × Multiple = Business Value. The multiple depends on the industry, company size, growth, and quality of the business model. For typical SMEs, multiples range between 4 and 8. A company with €500,000 EBIT and a multiple of 6 would have a value of €3 million. The question then is: How do you increase both the EBIT and the multiple?
What Drives the Multiple Higher
Not every company with the same EBIT gets the same multiple. The following factors increase the multiple: Recurring revenue and long-term customer contracts, a strong market position in a growing niche, low owner dependency and a competent second management level, documented and scalable processes, a diversified customer base without concentration risk. These are exactly the factors IDEASCANNER works on with you.
Avoiding Common Valuation Mistakes
Three typical mistakes in self-valuation: First, emotional overvaluation – you've invested 20 years of heart and soul, but the market values results, not effort. Second, confusing revenue with value – a company with €10 million in revenue and 1% margin is worth less than one with €3 million and 15% margin. Third, extrapolating one-time effects – a single record year is not sustainable earnings. Buyers look at the adjusted results of the last 3-5 years.
The Path to Value Enhancement: First Understand, Then Act
The first step toward value enhancement is understanding your starting position. Where do you stand on value drivers? Which areas have the greatest potential? What costs the least and delivers the most? A systematic analysis shows you exactly which levers to pull. Then it's about consistent implementation – step by step, measurable and traceable.
Discover with a free AI analysis where the greatest value enhancement potential lies in your business.