This video was made at GREIF VELOX in Lübeck, a BPE portfolio company acquired in an MBO in 2018.

Solving succession

From value to price

Determining the final company value

Aspects of pricing

Defining the value of a company in an unacademic and realistic way is a difficult, mostly subjective and emotional process.

The basis for determining a company’s value is ultimately and invariably defined by the future benefits that an acquirer can derive from the respective company. Generally, the income generated in the past is used as an indicator of sustainable future earnings. This value is then multiplied by a factor, which in turn is based on a wide range of external and internal considerations, to finally determine a company’s enterprise value.

Factors determining the relevant multiplier are, for example, the stability of expected future earnings (e.g. a high degree of customer dependency or a significant investment backlog would potentially reduce this stability), the innovative strength of the company and its products, an international expansion strategy or, for example, in the mechanical engineering sector, a high installed base of machines.

High barriers to market entry, such as an established brand or highly specialised patent-protected production know-how, has an important positive influence on factor magnitude.

The company’s enterprise value, determined according to the multiple method, is then used to subsequently ascertain its “equity value (i.e. the purchase price)”. Non-operating assets, cash and cash-like items, such as non-operating financial assets are then added to the enterprise value. Then all financial liabilities of the company as well as liabilities attributable to the period prior to the sale of the company (e.g. tax liabilities and provisions) are deducted from this amount in order to arrive at the company’s equity value.

For example, an enterprise value determined as follows
could lead to the following purchase price: