Determining the value of a business sounds like a straightforward calculation, but in practice it is often more complex. There are several valuation methods, each with its own assumptions, appropriate use cases, and limitations. Which method you use depends heavily on the type of business, the purpose of the valuation, and the specific situation you’re in. In this blog, we’ll walk you through the most important methods and explain when to use each one.
One company, multiple values?
You might think there’s only one correct answer when it comes to a company’s value. But in reality, the answer depends heavily on the perspective you choose. Are you looking at what the company could generate in the future? What comparable companies on the market are worth? Or what the assets on the balance sheet represent?
The five most commonly used methods are:
- Discounted Cash Flow (DCF)
- Valuation Based on Multiples
- Profitability Value
- Intrinsic value or liquidation value
- Adjusted Present Value (APV)
They each approach value from a different perspective. Choosing the right method is therefore not a matter of “right or wrong,” but of “what fits your goal.”
The DCF Method: Value from the Future
The discounted cash flow (DCF) method looks to the future. It is based on the amount of free cash flow the company is expected to generate in the future. These amounts are then discounted to their present value using a discount rate that reflects risk and the cost of capital (the well-known WACC).
This method is particularly well-suited for companies with stable results or well-founded growth plans. Examples include established companies with recurring revenue, or fast-growing companies with clear margin targets and investment plans.
The main advantage of DCF is that it shows how much value is embedded in the expected performance. At the same time, it relies heavily on assumptions: revenue growth, margins, investments, working capital… everything factors in. Even small changes can significantly affect the outcome. That is why the method is powerful, but sensitive. It is often combined with other methods as a reality check.
Multiples: Fast and Market-Oriented Comparisons
While DCF is forward-looking, multiples are based on today’s market. You compare your company to other companies in the same industry and apply their valuation ratios, such as EV/EBITDA or EV/revenue.
This method is quick and easy to understand, especially for parties that frequently analyze market data. It works well in sectors such as IT, services, or retail, where a wealth of comparative data is available. However, its reliability hinges entirely on choosing the right benchmarks. Are they truly comparable in terms of scale, profitability, and growth prospects? And have the figures been normalized?
A common misconception is that price equals value. A multiple reflects what buyers in the market were willing to pay, but says nothing about your company’s fundamental performance. So use it as a benchmark, not as an absolute truth.
Profitability Value: Return on Investment First
The value in the money is all about the relationship between profit and the required rate of return. You divide the normalized profit by the rate of return that an investor can reasonably expect. The result is the value at which a buyer recoups their investment, given the risk.
This method is particularly well-suited for stable small and medium-sized enterprises (SMEs) without specific growth plans. The advantage is its simplicity: you don’t need complex forecasts. However, estimating the required rate of return remains subjective. What one person considers a sufficient rate of return, another may find too low. The industry, economic conditions, and perception of risk play a major role here.
In practice, the value-to-earnings ratio is often used by financial buyers or family-owned businesses that are seeking sustainable returns rather than strategic synergies.
Intrinsic Value and Liquidation Value: Lower Bound or Worst-Case Scenario
Sometimes profitability is less important than the value of the assets. This is the case, for example, with restructuring, loss-making companies, or in capital-intensive sectors. Intrinsic value is based on the balance sheet: what is the company worth if you sell all its assets at realistic values and pay off all its debts?
The liquidation value is even more conservative. It takes into account discounts on assets—for example, because machinery fetches less at auction than its book value, or because inventory is only partially saleable.
Neither method provides a market value, but they do provide a lower bound. They are rarely used as the sole basis for valuation, but they are valuable as a “sanity check” or in negotiations during a distress sale.
APV Method: When Financing Is the Deciding Factor
The Adjusted Present Value (APV) method is a variation of the DCF method, but with one key difference: the effect of financing is valued separately. First, you calculate the value as if the company were financed entirely with equity. Then, you add the value of the tax benefit from debt (the so-called interest tax shield) to that figure.
This approach is relevant when the financing structure varies significantly between scenarios or when, for example, you are considering a leveraged buyout. In typical SME situations, this method is less common, but it is a useful tool for financial buyers.
Can you combine methods?
In fact, that’s actually the sensible thing to do. Almost all valuation reports use multiple methods. This creates a range within which the final value falls, depending on assumptions, market conditions, and negotiating position.
A common combination is:
- DCF as a Basis for Fundamental Value
- Multiples as a Market Test
- Intrinsic value as a lower limit
That combination makes your story credible, both to buyers and to shareholders or investors. It shows that you understand where the value comes from and where the limits lie.
Frequently Asked Questions
What is the most commonly used valuation method in business acquisitions?
Multiples such as EV/EBITDA are used most often because they are quick and market-oriented. For in-depth valuation, DCF is more reliable.
Why do the results vary so much?
Because each method takes a different perspective: future, market, balance sheet, or return. There is no objective truth; only well-founded assumptions.
Can I perform a valuation myself?
You can get a rough estimate using online tools or simple multiples. But for serious discussions with buyers or investors, a professional valuation is essential.
Are you on the verge of a sale, investment, or merger? If so, make sure to get expert advice on the right valuation method. Schedule a no-obligation consultation with one of our experts at Hogenhouck M&A and gain insight into the true value of your company—well-reasoned, clear, and strategically applicable.
