Company Valuation: Methods, Worked Example and Mistakes

A company valuation estimates what a business, or the shares in it, are worth on a given date. For an established company you usually multiply adjusted EBITDA by a multiple taken from comparable companies, check the result with a discounted cash flow (DCF) or capitalised earnings calculation, and deduct net debt to arrive at the value of the shares. The answer is always a range: in the worked example below, 10.8 to 14.4 million euro for all shares in a software company with 10 million euro of revenue.

This guide covers the methods buyers and investors use, including the German standard that auditors and courts rely on. It explains the difference between enterprise value and equity value, values a startup two ways and works through one complete example.

How do you value a company?

Most methods fall into one of four groups:

• Multiples: a metric such as revenue or EBITDA times a factor that buyers pay for similar companies.
• Present value methods: the DCF method and the capitalised earnings method convert the surpluses of future years into today's money.
• Asset value: the individual assets at current value, minus the debts.
• Startup methods: the venture capital method and the First Chicago method work back from an expected sale several years out.

In Germany, valuation practice is shaped by IDW S 1, the standard published by the Institute of Public Auditors in Germany (IDW). It is not a statute, but expert valuers and courts rely on it. Under IDW S 1, a company is worth the present value of its future financial surpluses, calculated with the capitalised earnings method or a DCF method. Multiples only serve as a plausibility check. In company sales and funding rounds, however, buyers and investors almost always talk in multiples. A sound valuation uses both.

Keep value and price apart. Value is the result of a calculation from one party's point of view. Price is what buyer and seller agree on. How far the two drift apart depends above all on how many serious bidders are at the table.

How do you value a company based on EBITDA or revenue?

The multiples method is the quickest route: enterprise value equals a metric times a multiple. For profitable companies the metric is usually adjusted EBITDA, meaning earnings before interest, taxes, depreciation and amortisation, cleaned of exceptional items. For fast growing companies without profit, buyers use revenue or annual recurring revenue (ARR) instead.

The multiple comes from two sources:

• Trading comparables: the market value of similar listed companies plus their debt, divided by their EBITDA or revenue.
• Precedent transactions: what buyers actually paid for similar companies in completed deals.

The popular rule of thumb of "profit times X" is this method in rough form. It is fine for a first sense of scale, not as a price. A multiple from a listed group rarely fits a company with 10 million euro of revenue. Size, growth, margin, customer base and market cycle all move the factor. Reliable ranges come from transaction databases with genuinely comparable deals, not from press reports about a single headline sale.

What is the capitalised earnings method under IDW S 1?

The capitalised earnings method, known in German as Ertragswertverfahren, takes the surpluses that can flow to the owners after interest and corporate taxes and discounts them to today. The rate used is the capitalisation rate, which reflects the return owners expect for the risk they carry. Because interest on loans has already been deducted, the result is the value of the equity directly.

A simple illustration: if you expect a lasting surplus of 500,000 euro a year and the capitalisation rate is 10 percent, the capitalised earnings value is 5 million euro (500,000 divided by 0.10). A full IDW S 1 report plans the surpluses year by year and derives the rate from capital market data.

Do not confuse it with the simplified capitalised earnings method in the German Valuation Act (sections 199 et seq. BewG). That method is used for tax purposes such as gift and inheritance tax and often produces different figures from a valuation for a sale.

How do you value a company using DCF?

The DCF method values a company at the present value of its future free cash flows. Free cash flow is the cash left after taxes, capital expenditure and the build up of inventory and receivables. Under IDW S 1, DCF and capitalised earnings give the same result when the assumptions are consistent. The common version has five steps:

1. Forecast free cash flows for three to five years.
2. Calculate a terminal value for the years after that, usually as a perpetuity with a small, lasting growth rate.
3. Discount everything at the weighted average cost of capital (WACC), a blend of the return owners expect and the interest lenders charge.
4. Add up the present values. That is the enterprise value.
5. Deduct net debt. That is the value of the shares.

The weak spot is the terminal value. It often makes up most of the result, around 80 percent in the example below. Small changes to the discount rate or the long term growth rate therefore move the value a lot, which is why buyers always ask for a sensitivity table.

When does asset value matter?

Asset value, or net asset value, adds up all assets at current value and deducts the debts. For a technology company it says little, because the value sits in software, customer relationships and the team, and none of that shows up properly on the balance sheet.

IDW S 1 gives asset value no standalone role. It matters in two situations. First as liquidation value: if winding the company up and selling the assets one by one would bring in more than continuing the business, that figure is the floor. Second in German tax law: for shares in unlisted corporations, the fair market value for tax purposes may not fall below the net asset value (section 11 (2) BewG).

How do you value a startup?

When a company still makes losses, nearly all of its value sits in distant forecast years, and present value methods become unreliable. Investors therefore work back from an expected exit. Two methods are common.

The venture capital method

The investor estimates the value at a sale five to seven years out and discounts it with a target return. A worked example with assumed figures:

1. Investment today: 2 million euro. Planned revenue in year five: 20 million euro.
2. Assumed exit multiple of 4 times revenue: exit value 80 million euro.
3. The investor wants ten times the money, so 20 million euro. That requires 25 percent at exit (20 divided by 80).
4. Later rounds will dilute the stake. If the investor keeps an assumed 75 percent of it, the stake needed today is 33.3 percent (25 divided by 0.75).
5. Post money valuation: 2 million divided by 33.3 percent equals 6 million euro. Pre money valuation: 6 minus 2 equals 4 million euro.

Ten times the money in five years is roughly 58 percent a year. The high target covers the risk that many investments fail, because the method only looks at the success case.

The First Chicago method

The First Chicago method works with several scenarios and weights them by probability. Same startup, assumed figures:

• Plan case: exit at 80 million euro, probability 30 percent, weighted 24 million euro.
• Sideways case: exit at 30 million euro, probability 40 percent, weighted 12 million euro.
• Failure: 0 euro, probability 30 percent, weighted 0 euro.

The weighted exit value is 36 million euro. Because failure now sits explicitly in the calculation, a lower target is enough, here four times the money (roughly 32 percent a year). 36 million divided by 4, times 0.75 for dilution, gives a post money valuation of 6.75 million euro and a pre money valuation of 4.75 million euro. Both methods land in the same range, which is the point of running two.

Investors also compare with the valuations of similar rounds. To see how pre money, post money and the investor's stake fit together, try the pre money and post money calculator. Which investors fit which stage is covered in our guide on how to find investors.

Enterprise value vs equity value: what is the difference?

Enterprise value is the value of the operating business. It belongs to all providers of capital together, owners and lenders alike. Equity value is the value of the shares, meaning what is left for the shareholders once the lenders are paid. EBITDA and revenue multiples and the DCF method give you enterprise value. Capitalised earnings and the pre money valuation in a funding round are already equity values.

Net debt is the bridge between the two. Starting from enterprise value:

• deduct bank loans, shareholder loans and other financial debt
• add cash that is freely available
• deduct items that behave like debt, such as pension provisions or overdue taxes
• add assets the business does not need, such as an unused property

In a share purchase agreement this usually appears as a "cash free, debt free" price. The buyer offers a price for the business without debt and without cash, then the actual debt is deducted and the cash added. If you receive an offer of 15 million euro on that basis, carry 3 million euro of loans and hold 1 million euro in the bank, you get 13 million euro for your shares.

Worked example: valuing a software company step by step

A fictional software company sells planning software to small and medium businesses. Last year's figures:

• Revenue: 10.0 million euro, a little over three quarters of it recurring
• Reported EBITDA: 1.5 million euro
• Bank loans: 2.5 million euro, shareholder loans: 0.5 million euro
• Freely available cash: 1.2 million euro

The multiples below are assumptions for the calculation, not market data for any sector.

1. Adjust EBITDA. The two founders, who also run the company, pay themselves 150,000 euro a year more in total than hired managing directors would cost. On top of that came 150,000 euro of exceptional legal costs. Adjusted EBITDA: 1.5 plus 0.15 plus 0.15 equals 1.8 million euro.
2. Apply the multiple. Assumed range of 7 to 9 times EBITDA: 1.8 times 7 equals 12.6 million euro, 1.8 times 9 equals 16.2 million euro of enterprise value.
3. Cross check against revenue. Assumed range of 1.2 to 1.6 times revenue: 12.0 to 16.0 million euro. The two ranges agree.
4. Run the DCF. Planned free cash flows: 1.1, 1.3 and 1.5 million euro in years one to three. WACC of 11 percent, long term growth of 2 percent after that. Discount factors: 0.9009, 0.8116 and 0.7312. Present values: 0.991 plus 1.055 plus 1.097 equals 3.14 million euro.
5. Add the terminal value. Cash flow in year four: 1.5 times 1.02 equals 1.53 million euro. Terminal value: 1.53 divided by 0.09 (11 minus 2 percent) equals 17.0 million euro. Discounted to today: 17.0 times 0.7312 equals 12.43 million euro.
6. DCF enterprise value. 3.14 plus 12.43 equals 15.57 million euro, about 80 percent of it from the terminal value.
7. Work out net debt. 2.5 plus 0.5 minus 1.2 equals 1.8 million euro.
8. Derive equity value. Multiples: 12.6 minus 1.8 equals 10.8 million euro, 16.2 minus 1.8 equals 14.4 million euro. DCF: 15.57 minus 1.8 equals 13.77 million euro.

Result: a plausible range for 100 percent of the shares is 10.8 to 14.4 million euro. The DCF value of about 13.8 million euro sits in the upper part, which makes sense because the plan assumes rising cash flows. A buyer will test exactly that plan in due diligence.

How sensitive is it? With a WACC of 10 instead of 11 percent, the DCF enterprise value rises to about 17.6 million euro. At 12 percent it falls to about 14.0 million euro. One percentage point moves the value by 10 to 13 percent. Long term growth of 1 percent instead of 2 gives about 14.2 million euro, 3 percent gives about 17.3 million euro.

What about asset value? For this company it is around 2 million euro, mostly receivables and cash less debt. It plays no part in the price, because the value lies in the running business.

For a first range for your own company, the valuation calculator works from your sector, revenue history and profitability. It is not a valuation, but it quickly tells you which ballpark you are in.

What drives company value?

Two companies with the same EBITDA can be worth very different amounts. These are the drivers that make the difference:

• Growth: faster growth means higher future surpluses and a higher multiple.
• Recurring revenue: contracts and subscriptions are easier to forecast than project work.
• Margin: a high gross margin shows that growth does not bring the same amount of new cost every time.
• Customer concentration: if one customer brings in a quarter of revenue, every buyer applies a discount.
• Key person dependency: if sales only run through the founder, value drops or the buyer asks the founder to stay on longer.
• Forecast track record: if you hit your past plans, buyers believe the new one.
• Clean numbers: monthly reporting, a financial model and an organised data room shorten the review and lower the risk from the buyer's side.
• Competition between bidders: one bidder negotiates differently from three.

Common mistakes

• Relying on one method: a valuation only holds up when at least two methods agree or the gap between them is explained.
• Using unadjusted figures: exceptional costs, private expenses or an owner salary far above or below market distort every result.
• Mixing up enterprise and equity value: an EBITDA multiple gives the value for all providers of capital. Your shares are worth less as soon as there is debt.
• Borrowing someone else's multiple: factors from large listed US groups or from a press release about a single deal rarely fit your company.
• The hockey stick forecast: if revenue and margin suddenly shoot up in the plan and you cannot show why, the buyer will use lower numbers of their own.
• An unchecked terminal value: a high growth rate in the terminal value stretches an exceptional phase into eternity.
• Confusing value with price: a calculation shows value. Negotiation, deal structure and the number of bidders decide the price. Earn outs, warranties or liquidation preferences also change what you actually receive.

Frequently asked questions

How much is my company worth?

Only your own numbers can answer that. A good first step is adjusted EBITDA times a range of multiples from comparable companies, minus net debt. Without profit, use revenue as the base. Then check the result with a second method.

Which valuation method is best?

There is no single right method. Profitable companies are usually valued with EBITDA multiples plus a DCF or capitalised earnings check. Startups without profit are valued with revenue multiples, the venture capital method and comparable rounds. What matters is that at least two methods point the same way.

Do I need an IDW S 1 report to sell my company?

No. In a sale between independent parties the negotiated price decides, and no law requires a formal report. You mainly need an IDW S 1 report when a value has to stand up in court, for example in a dispute over a departing shareholder's compensation.

How much does a company valuation cost?

It depends on the purpose and scope. An online calculator gives you a first indication for free. A report by a German auditor under IDW S 1 takes far more work and costs accordingly. For a sale or a funding round, a solid range with disclosed assumptions is usually enough.

How does the German tax office value shares?

It uses fair market value under the German Valuation Act. For shares in unlisted corporations, this is primarily derived from sales between unrelated parties within the past year, otherwise from earnings prospects. Net asset value is the floor (section 11 (2) BewG). Work through the details with your tax adviser.

How do you value a company with negative EBITDA?

With revenue or ARR times a multiple, with the venture capital method and with valuations from comparable funding rounds. Growth, gross margin and customer retention decide where in the range you land.

How long is a valuation valid?

Strictly speaking, only for its valuation date. If your figures, interest rates or the prices paid for comparable companies change, you need to recalculate. During a sale or a round, update the valuation as new monthly figures come in.

How Roemer Capital helps

Roemer Capital is an independent fundraising and M&A boutique based in Düsseldorf. We work with technology companies that have a product in the market and ongoing revenue, on funding rounds from 1 million euro and on company sales. We never value with a single method. The basis is a financial model over at least three years with a base case, a downside case and an upside case, set against multiples and comparable transactions. The result is a range with disclosed assumptions that we defend in front of investors and buyers.

That range is a basis for negotiation, not a formal valuation report. If you need a figure for the tax office, an inheritance or a court, an auditor or tax adviser is the right person to ask. If you want to put your numbers in context for a sale or a round, book an intro call.

Note

As of October 2026. This article does not replace legal or tax advice.