What Is My Company Worth? An Overview of Valuation Methods

Every figure in a company valuation begins as a line in the profit and loss account, and almost none survives the journey unchanged. Reported earnings describe what was booked under accounting and tax rules; an adjusted, sustainable earnings figure describes what the same operations would generate for a new proprietor. The distance between those two numbers is where the arithmetic happens.

From reported earnings to a sustainable figure

Normalisation strips out everything in the accounts that reflects the proprietor's personal arrangements rather than the trading operation, plus everything that will not repeat. It runs both ways: add-backs lift the result, deductions push it down. A calculation that only ever adds back is a wish list, and a competent counterparty will treat it as one.

Adjusting the proprietor's remuneration

Owner-managers rarely pay themselves a market salary; drawings follow tax planning, liquidity or habit. The correction replaces the actual figure with what it would cost to employ someone to do the same job at arm's length: if the proprietor draws less, the difference is deducted from earnings; if more, the excess is added back.

The same logic covers family members on the payroll whose duties do not match their pay, and premises owned personally and let to the business: rent well above or below the local market rate must be reset to an arm's length amount before anything is multiplied.

Private costs and one-off effects

Next come items belonging to the proprietor rather than the trade: private travel booked as a business trip, family insurance policies, personal legal fees. Each is added back individually, with an amount and a written reason.

One-off effects cut both ways. A restructuring charge, a settlement paid to end a dispute, storm damage — added back. A gain on disposal of a machine, a one-time insurance recovery, an unusually large order that will not repeat — deducted. Credibility rests on treating favourable and unfavourable items with equal rigour; anything you cannot evidence from ledgers or contracts is better left out than argued.

EBIT or EBITDA as the reference measure

EBITDA excludes depreciation and amortisation, which helps when comparing businesses whose assets differ in age and whose financing differs in structure. Its weakness: in capital-intensive operations, depreciation is a rough proxy for real reinvestment need. Take it out and the business looks more profitable than the cash cycle allows.

EBIT keeps depreciation in and sits closer to what the plant costs to maintain. Where leases are capitalised, rent moves out of operating costs into depreciation and interest, which mechanically inflates EBITDA. Whichever measure you pick, the factor applied to it must be derived from the same measure — mixing an EBIT factor with an EBITDA figure produces a number with no meaning.

A worked calculation, for illustration only

The figures below are placeholders showing the sequence, not market data. Reported EBIT of 800. Add back 150 for drawings above an arm's length salary. Deduct 60 because the rent charged to the business sits below the local market level. Add back 90 for a one-off legal dispute. Deduct 40 for a non-recurring insurance recovery. Adjusted EBIT: 940. Applied to an illustrative factor of 5.0, that yields an enterprise value of 4,700. Where real factors sit for a given sector is set out in "EBITDA Multiples by Industry".

The bridge to the value of the shares

An enterprise value prices the operating business as a whole, funded by borrowings and equity together — it is not the amount reaching the seller. Deduct interest-bearing liabilities: bank loans, overdrafts, shareholder loans, finance leases, factoring lines, and provisions with a debt-like character such as unfunded pension commitments. Then add back cash the business does not need to keep running.

Continuing the illustration: 4,700 less borrowings of 1,200 plus surplus cash of 300 gives 3,800 for the shares. Two traps recur. Not all cash is free — the balance needed to cover payroll and supplier runs stays in the business. And obligations without an interest coupon, such as accrued holiday entitlement, still reduce what the equity is worth.

Normalising working capital

A buyer expects the business to arrive with a normal amount of stock, receivables and payables in it. "Normal" has to be measured: take monthly balances across a full seasonal cycle and derive a reference level, since a single year-end snapshot usually falls at the quietest point of the year.

Any deviation from that reference at completion is settled against the price, which is why running down inventory or stretching suppliers shortly before a handover produces no lasting benefit — the mechanism reverses it. Structural improvements made early enough to show in the averages do carry through; the levers are covered in "Increasing Company Value".

Assets that sit outside the operating perimeter

Land no longer used, a privately occupied flat held in the company, a securities portfolio, an over-funded cash reserve: none belongs in the operating figure. Value them separately at realisable amounts and add them once the operating result is established. Crucially, remove the matching income and expense from the earnings figure too — otherwise rental income from a surplus property is counted once inside the multiple and again as an asset.

Cross-checking the outcome

A factor-based result should never stand alone. Rebuild the number from discounted future surpluses and compare — the mechanics are covered in "Earnings Value vs. DCF" — then set a floor by summing tangible assets less liabilities, as described in "The Asset-Based Method". If the three land far apart, one input is doing too much work, usually a forecast margin or a factor borrowed from businesses that are not comparable.

Finish with a sensitivity check: recompute with adjusted earnings ten per cent lower and higher, and the factor half a turn either side. The output is a corridor with a defensible midpoint, not a single figure.

Numbers that survive scrutiny are built, not asserted. For an independent assessment: IGCP Capital Partners. → igcp.at

Frequently asked questions

Which adjustments will a buyer's advisers actually accept?

Those that can be traced to a document. An invoice, a contract or a payroll record makes an add-back verifiable; a verbal explanation does not. Items that recur in several years, or that are large relative to the result, attract the most scrutiny.

Should I calculate with EBIT or EBITDA?

It depends on how asset-heavy the operation is. Where machinery, vehicles or fit-out are replaced regularly, EBIT reflects the real cost base better; for asset-light service businesses, EBITDA is the more common reference. Factor and earnings measure must share one basis.

Why is the enterprise value not what I receive?

Because it prices the whole capital structure. Borrowings, leases, shareholder loans and debt-like provisions are deducted, and surplus cash added, before you reach what the shares are worth. On a leveraged balance sheet that gap can be very large.

How many years of accounts do I need?

Three completed financial years plus current-year interim figures are the usual basis: older periods reveal whether an adjustment is genuinely exceptional or quietly recurring, while recent ones carry more weight, because a buyer inherits the run rate rather than the history.