Company value calculation EBITDA - CALCULATOR

JUDr. Jakub Vozáb, PhD. 01.02.2023

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If you are thinking about selling your company, the basic question is, of course, what is its market value. The definition of market value according to International Valuation Standards is described as follows:

„Market value is the estimated amount for which the property should be exchanged on the valuation date between a willing buyer and a willing seller in a transaction between separate and independent parties after proper marketing in which both parties would act in an informed, reasonable and non-coercive manner.“

There are many methods for calculating the market value of a company (Methods of Valuation), which are described in countless thick professional books, however, it must be remembered that in the end, the company always has exactly the value that corresponds to the highest realistic offer from serious bidders. However, for the purposes of selling the company, especially for the correct setting of the initial sale price and for the evaluation of offers from interested parties, it is necessary to determine the approximate value of the company.

Individual methods of determining the value of a company shall be classified as follows:

• Methods based on revenue discounting – they are mostly based on an estimate of future cash flows, so it is necessary to establish an estimate of the expected revenues for at least 5 years ahead, which is often a problem. That is why data from previous years are used. The average annual return obtained in this way is discounted in the calculation by an interest rate that depends on the parameters of the company and on the sector in which it operates.
• Methods based on multipliers – are based on multiples of certain financial parameters, e.g. EBITDA, sales, net profit, etc. The multiples are based on the statistics of relevant completed transactions of comparable companies in the given industry. This can again be a problem, as such data may not always be of good quality, or even not available. Therefore, average or usual multiples are often used.
• Methods based on asset value – own tangible and intangible assets, receivables, stocks, money in the account and other assets that have their own value are relevant, and liabilities are deducted, e.g. loans, credits, trade payables and more. It is based on data recorded in accounting, however, the value of assets is adjusted to market value.

Simple calculation of the market value of a company

According to our experience, it is not necessary to pay consulting companies for complex calculations of the company's value at the outset, let alone order expert opinions. For a quick and relatively accurate calculation of the value of ordinary companies, one of the methods based on multipliers, also used by large consulting and auditing companies, is often used, which is based on the EBITDA value and calculates a so-called transaction multiple that takes into account the given area of operation of the company and further works with assets and liabilities.

The calculated market value of the company is purely indicative. Multipliers for individual industries may change depending on the development of the economy and changes in investor preferences.

Calculation description

EBITDA + depreciation for the last 3 years: We calculate the average sum of EBITDA + depreciation, usually for the last 3 years, to make the calculation relevant.

EBITDA = gross operating profit = profit before interest, taxes and depreciation Taxes, Depreciation and Amortization).

Multiple/Tran­saction multiple: We multiply the result by the transaction multiple corresponding to the given industry.

Transaction multiples usually range from 3 to 7, for companies with EBITDA over CZK 50 million per year, higher transaction multiples can then be expected. It depends on the industry in which the company operates.

Non-operating assets: According to the agreement with the investor, the value of non-operating assets (NA) can then be added (money and other tangible and intangible assets not needed for operation). In such a case, the investor pays for the company a price increased by these „free“ asset values, which may in certain circumstances be more advantageous than taking them out of the company before the sale, since the owner receives a price for these asset values in the form of a corresponding increased price for a share in the company (share in s.r.o. or shares in a.s.), where the income for these shares will usually be exempt from income tax. If the investor is not interested in these non-operating assets, or on the contrary the owner wants to keep these assets for himself, then these values are not included in the calculation and are taken out of the company before the sale, for example by direct sale to another interested party or division by spin-off into a successor company under the control of the owner (Transfer of Property (Real Estate) from Company to Shareholder and Income Tax).

On the other hand, operating assets (money and other tangible and intangible assets necessary for operation) are not taken into account, as they are essentially means of production necessary to generate profit, which remain in the company, and whose value is already taken into account in the calculation using gross operating profit.

Liabilities: We deduct long-term liabilities (long-term loans and credits) from the value of the company, as these are not related to the needs of the operating cycle itself and do not necessarily burden the company and must be repaid at some point in the future. For the investor, it is therefore a future cost in the nominal value of a long-term obligation, which he can eventually repay from the increased equity if he is no longer interested in using these external resources.

Conversely, short-term liabilities are usually not taken into account, as they are related to the course of the company's operating cycle and are paid during the operating cycle.

Operating cycle = inventory turnover time + receivables collection time It is the time during which the company converts the products into cash on the account or in the cash register. The indicator expresses how many days it takes to sell inventory and subsequently how many days it takes to collect receivables. Simply put, the operating cycle represents the time it takes to convert current assets into cash.

Furthermore, of course, the calculation of the value of the company is influenced by various factors, of which the most important ones can also be taken into account in the calculation. For example, it is possible to take into account the annual decrease or increase in sales, if the company operates without an owner or, conversely, if the role of the owner is essential. Furthermore, whether the industry is stable, showing growth or decline, as well as whether the company owns products and end customers or is dependent on a distribution chain that is not under its control.

Keywords: market value of business share company enterprise calculation of the value of business share company enterprise how to calculate determine the value of business share company enterprise EBITDA DCF discounted cash flow method transaction multiple method future income method Valuation of the value of the company's share of the company How to calculate the value of the company's share of the company How to determine the offer price of the company's share of the company Determination of the offer price of the company's share of the company

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