INBETS SME VALUATION ...

Sticking points and practical issues 

Kutscher, 2014 mentions the following sticking points of valuation:

1. There often is a lack of suitable data to determine the company value. Additionally, the necessary financial figures are often missing.
2. Private issues are mixed with business ones. Such abuses must first be adjusted before the actual valuation work can begin.
3. The company owner often has a fixed idea about how much the business is supposedly worth.
4. Other peculiarities: The business plan for the next three years is designed too optimistically. Even high cash holdings, which are not necessary on an operational level present a problem because they unnecessarily increase the transaction price.

Furthermore, Bucher and Schwendener, 2007; Hackspiel and Spies, 2010 and Huettche, 2014, 2017 mentions the following practical issues:

• The personal and/or family-relatedness must already be taken into account when preparing the planning calculation. This can lead to the situation that the value of many micro-enterprises falls back to the liquidation value.
• It is important to ensure that there is no double counting of the bankruptcy risk in the numerator and denominator.
• Particular attention should be paid to non-operating assets as the dividing line between entrepreneurial and private assets may become blurred.
• An understanding of the business model and value drivers are keys to a sound valuation.
• Correct financial reporting must be available. Mixing up of private and business transactions must be taken into account and corrected.
• Particular attention should be paid to the analysis of the past: entrepreneurs and companies are closely interwoven - transferability of profitability?
• Growth rate: Empirical studies show that the profits of companies grow less than the inflation rate.
• Company analysis: In the context of SMEs, also qualitative aspects need to be considered. In addition, the positioning of the company within the industry or the relevant target markets has to be worked out.
• Qualitative Analysis: Corporate governance and dependencies on individual people, customer and supplier structure, competitive position and corporate strategy should be considered.
• The quantitative analysis can be based on all instruments of conventional balance sheet analysis, consisting of success and financial analysis.
• Balance sheet items should be examined in more detail: Intangible assets and the existence of hidden reserves, also excessive working capital should be identified.
• As a rule, a non-limited lifetime of the company is assumed.
• Hidden benefits to shareholders must be corrected in the planning stage, e.g. wages and salaries, rent, car costs, sales and consulting costs.
• An imputed entrepreneurial salary incl. the associated social benefits are to be recognized.
• In case the income based approach is used:
  • Discount rate = weighted average
  • The base interest rate must be adjusted by surcharges or deductions using capital asset pricing model (CAPM).
  • Discounts for size, liquidity premium for control might be needed.
  • Corrections for further peculiarities, e.g. the imminent introduction of a new technology
  • Special attention: It is more difficult to sale company shares (fungibility surcharge); dependency on the entrepreneur and/or other key staff (surcharge due to dependency on persons) as well as risks related to the customer portfolio (surcharge for customer portfolio risks).
• Different accounting standards and their consequences on the valuation must be taken into account.
• The use of several methods is recommended to make the results plausible.
• In the case of family successions, the minimization of the tax burden is in the foreground, while in the case of sales to externals the maximization of the selling price dominates.