Business succession › Business valuation calculator › How it calculates
How the business valuation calculator works and what your result means
Every step laid open: from the profit in the annual accounts to the indicative value. And below that, how to read the result so that a number becomes a decision.
The basic idea
A buyer pays for the future, not for the past
Anyone buying a business is above all buying the earnings of the coming years. That is why the calculator uses the capitalised earnings method: it works out what the business earns on a sustainable basis when an outsider runs it, and divides that by a rate that reflects the buyer’s risk.
There is also a lower limit. Machinery, vehicles and stock have a current value that could be realised even without customers. If the capitalised earnings value is lower, the net asset value applies. Whatever the capitalised earnings value exceeds the net assets by is the goodwill: the price for customers, reputation and team.
In the German trades, the chambers’ business advisers value businesses on this principle, known as the AWH standard. In Austria, the expert opinion KFS/BW 1 is the benchmark for valuations, and it too starts from earnings.
The calculation
Six steps from the annual accounts to the indicative value
This is how the detailed version calculates. The quick version takes the same steps but leaves out the adjustments and sets the rate according to your answer on dependence on the owner.
01 · Average
Weighted annual profit
The results of the last three years count in a ratio of 1 : 2 : 3. The most recent year carries the most weight because it is closest to the future.
02 · Adjust
What a buyer will earn in future
One-off income is deducted, one-off expenses are added back. Tax depreciation is replaced by the replacement investment actually needed, and a missing rent for premises you own is deducted.
03 · Owner’s salary
Your work has a price
From the result, we deduct what an employed manager would cost in your place, plus the value of family members working unpaid. A buyer does not get this work for free.
04 · Tax
Standardised, not individual
A standardised income tax of 35% is deducted from the adjusted result. This makes businesses comparable regardless of legal form and personal tax situation.
05 · Rate
Capitalisation
The sustainable earnings after tax are divided by the capitalisation rate. At around 20%, that equals roughly five times the earnings after tax. The higher the risk, the higher the rate and the lower the value.
06 · Net assets and adjustments
Lower limit and balance sheet items
The higher of the capitalised earnings value and the net asset value counts. Bank balances and receivables are then added, while liabilities and an investment backlog are deducted. The result is rounded to the nearest 5,000 or 10,000 euros.
A worked example
The electrical contractor the calculator is pre-filled with
Twelve employees, annual profits of 135,000, 150,000 and 160,000 euros, level of digitalisation 50%. This is how the indicative value of around 220,000 euros comes about:
- Weighted annual profit: (1 × 135,000 + 2 × 150,000 + 3 × 160,000) ÷ 6 = €152,500
- Adjustments: − €10,000 one-off income, + €25,000 tax depreciation, − €30,000 replacement investment needed
- Owner’s salary: − €65,000. This leaves an operating result of €72,500
- Standardised tax of 35%: − €25,375. Sustainable earnings after tax: €47,125
- Capitalisation rate 21% (3% base rate + 18% risk premium, digitalisation neutral): 47,125 ÷ 0.21 = €224,405 capitalised earnings value
- Net asset value €120,000. The capitalised earnings value is higher, so the goodwill is around €105,000
- Adjustments: + €40,000 bank and receivables, − €25,000 liabilities, − €20,000 investment backlog
- Indicative value: 224,405 − 5,000 = €219,405, rounded €220,000
Example values for illustration, not real business data. The range in the calculator shows how the value shifts if a buyer rates the risk three percentage points higher or lower.
The strongest lever
Capitalisation rate and digitalisation
Small businesses are riskier for buyers than large ones: fewer customers, more dependence on the owner, no market on which shares are traded. That is why business advisers in the trades work with a capitalisation rate of just under 20% and more. In the quick version, the calculator uses 18% if the business depends little on the owner, 21% for medium and 25% for strong dependence.
The level of digitalisation shifts this rate by up to two percentage points: plus two at 0%, neutral at 50%, minus two at 100%. Behind this is the same reasoning as in the worked example for the handover check: where quotes, invoices, filing and site documentation run digitally, less depends on the owner’s head. That lowers the risk for the buyer and their bank.
0%
Paper and memory
Rate 23%. For the example business in the quick calculation, around 250,000 euros.
€250,000
Indicative value
50%
Partly digital
Rate 21%, digitalisation has a neutral effect. The same business: around 270,000 euros.
€270,000
Indicative value
100%
Fully digital
Rate 19%. The same business, the same figures: around 300,000 euros.
€300,000
Indicative value
The effect of digitalisation is an assumption of this calculator and deliberately cautious. Not included is the fact that a relieved office usually improves earnings as well, for example through faster invoicing and fewer outstanding items.
Interpretation
How to read your result
The figure at the top of the result is the beginning, not the end. What matters is how the capitalised earnings value and the net asset value relate to each other and what the calculator reports back on digitalisation.
Earnings value well above net assets
Your business has real goodwill
Here, buyers pay for customers, reputation and team. This value needs to be secured until the handover: it depends on customers and key staff staying when you leave.
Earnings value close to net assets
The value lies mainly in machinery and vehicles
Even a little more sustainable earnings raises the value noticeably. In the quick calculation, every euro the business permanently earns on top after the owner’s salary adds around three euros of value.
No earnings after owner’s salary
A buyer pays only for the net assets
The profit is not enough to pay a manager. This is more common than you might think, and it is no judgement on your work. It shows where the lever is: in earnings and in taking load off the owner.
Tax value much higher
No reason to celebrate, no reason to worry
The simplified capitalised earnings method of the German Valuation Act (Bewertungsgesetz) uses a fixed factor of 13.75. It serves inheritance and gift tax purposes and, for small businesses, is usually far above what buyers pay. It is shown for comparison only.
What the note on digitalisation means
0 to 25%
A big, quick lever
You can raise the value of your business sustainably and relatively quickly. The calculator shows what would be arithmetically possible at 75% digitalisation. How you get there is something we clarify in the first conversation.
26 to 74%
There is still value here
Some things run digitally, some still on paper and by word of mouth. Usually a few targeted steps in the office bring the most. The handover check shows which ones apply to you.
From 75%
Well set up digitally
This lowers the risk for a buyer and supports the price. Maintain this level until the handover and make sure it does not depend on a single person.
The calculator provides an indicative value based on your own information and simplified assumptions. It is not a business valuation, not an expert opinion and not a commitment to a sale price. For a formal valuation, I can put you in touch with a tax adviser or auditor from my network on request.
Back to the calculation or on to the next step:
Turning the figure into a roadmap
In the first conversation, we put your result into context together: where is the biggest lever, what brings the most before the handover, and is a handover check worthwhile for you? Free of charge and without any obligation.