Valuation Range

What is a valuation range?

Valuation range refers to the interval between a lower and an upper value within which the value of a company or its shares plausibly lies according to the valuation methods applied. The German term is Bewertungsspanne; Bewertungsbandbreite is also used. Instead of a single figure, it states a band of values. It shows how strongly the result depends on assumptions, above all the plan, the prices of comparable companies and the cost of capital. The cost of capital is the return that providers of capital expect for the risk of their investment. In a similar way, a tradesman quotes a cost estimate range rather than a fixed price for an old building as long as it is unclear what lies behind the walls.

Valuation ranges arise wherever a company value is assessed before a decision or negotiation. This applies to the preparation of a funding round, the sale of a company and succession, the non-binding first offers from prospective buyers, and opinions from independent experts on the adequacy of a purchase price (fairness opinions). There is no statutory requirement for their form; what matters are the principles of business valuation and the purpose of the valuation.

A band of values instead of a point value

Every valuation method condenses assumptions into a single figure. The DCF valuation (discounted cash flow) converts the expected future cash surpluses into their present value; the result depends on growth, margin and cost of capital. A multiples method sets the value as a multiple of a key figure, such as earnings, and depends on the selection of comparable companies. For growth companies, the largest part of the value in a DCF valuation often falls on the terminal value, that is, the value of all years after the planning period. It reacts sensitively to small changes in the discount rate and the long-term growth rate.

A point value suggests a precision that the method cannot deliver. A range discloses the interval in which the result lies under defensible assumptions and which assumptions are decisive. It also separates value from price: the value is the result of a calculation from the point of view of one party, the price the result of negotiation and competition.

German valuation theory distinguishes values by their purpose. The decision value (Entscheidungswert) is a party's limit price: the highest price a buyer can pay, or the lowest a seller can accept, without being worse off. Alongside it stand the mediating arbitration value (Schiedswert) and the argumentation value (Argumentationswert) for negotiation. For the seller, the range answers two questions: below which price a sale is not worthwhile, and up to which price their own asking price can be justified.

Derivation from several methods and scenarios

Several valuation methods

A reliable range rests on at least two mutually independent methods. A common combination is a method that derives the value from the company's future surpluses, such as the DCF method or the capitalised earnings value method (Ertragswertverfahren), together with multiples of listed comparable companies and comparable transactions. For profitable companies, the reference figure for the multiples is often EBITDA, earnings before interest, taxes, depreciation and amortisation. For fast-growing software companies without sustainable profit, it is more often recurring revenue.

Scenarios and sensitivities

Within each method, the range arises in two ways. Scenarios change the operating plan as a whole, for example in a base case, a cautious case and an optimistic case. Sensitivities change individual parameters while keeping the same plan, typically the cost of capital and the long-term growth rate, or the level of the multiple.

Consolidation at one value level

In practice, the results are often placed side by side as a bar chart (football field). This yields the overall range from the lowest to the highest defensible value and a narrower core range in which the methods overlap. A prerequisite is a uniform value level. Multiples methods and the usual DCF calculation yield the company value (enterprise value), that is, the value of the operating business for owners and lenders together. The value of the shares, the equity value, results only after deducting net debt (financial debt less freely available liquid funds) and debt-like items such as pension provisions.

Width and informative value

The width of a range follows from the predictability of the cash flows. For an established company with stable earnings and long customer contracts, the methods are often close together; for a growth company whose value arises predominantly in future years, they are further apart.

A range becomes narrower through better data, not by leaving out unfavourable calculations. This includes adjusted EBITDA that can be traced over several years, data on customer retention by customer cohort, a plan whose earlier versions can be measured against actual figures, and a well-founded peer group.

Use in funding rounds and company sales

Funding round

In a funding round, the pre-money valuation, and with it the price per share (Geschäftsanteil), is agreed as a point value. The range serves as preparation. It shows which valuation expectation can be justified with key figures. At the same time, it shows at which valuation the dilution remains bearable, that is, the reduction in the percentage holding of the existing shareholders caused by the new shares. Investors often derive their range from the expected value at the later exit and the target return. Where the two ranges overlap lies the room for negotiation.

Valuation and contract terms belong together. A liquidation preference secures investors their investment, or a multiple of it, with priority in a sale. If it is structured as a multiple or participating preference, a higher valuation can be worth less to the founders in a later sale than a lower one with market-standard terms.

Company sale

In a sale process, the range puts the incoming offers into context. In a structured auction process, in which several prospective buyers bid according to fixed rules and deadlines, they often submit non-binding offers in the first round. These are themselves formulated as a range and are subject to due diligence, the buyer's detailed examination of the company. For the comparison, what counts is not the stated company value but the amount that reaches the shareholders. For this, net debt is deducted, net working capital is adjusted, and deferred or conditional parts of the purchase price are taken into account. Where expectations differ, part of the difference can be bridged by an earn-out, a part of the purchase price whose amount depends on developments after closing.

Relationship to negotiation

A single value invites the other side to undercut it across the board. A range with disclosed assumptions steers the conversation towards the question of which characteristics justify a placement in the upper or lower half. These include contract terms, customer concentration, dependence on key people and the plan reliability of the past.

Worked example: calculating a valuation range

A software company achieves an adjusted EBITDA of EUR 2.0 million and expects free cash flow of EUR 1.2 million for the coming year. Net debt, including debt-like items, is EUR 3.0 million. The DCF calculation is simplified for traceability: it assumes a cash flow that grows at a fixed rate without end (perpetuity). The value is then the free cash flow of the next year divided by the difference between the cost of capital and the growth rate.

• Transaction multiples of 7.0 to 8.0: EUR 2.0 million × 7.0 = EUR 14.0 million to EUR 2.0 million × 8.0 = EUR 16.0 million enterprise value
• Stock market multiples of 6.0 to 7.5 after a discount for size and lack of tradability: EUR 2.0 million × 6.0 = EUR 12.0 million to EUR 2.0 million × 7.5 = EUR 15.0 million
• DCF calculation, cautious approach with 11% cost of capital and 1% growth: EUR 1.2 million / (11% minus 1%) = EUR 12.0 million
• DCF calculation, base approach with 10% cost of capital and 2% growth: EUR 1.2 million / (10% minus 2%) = EUR 15.0 million
• Overall range of enterprise value: EUR 12.0 to 16.0 million; core range in which all three methods overlap: EUR 14.0 to 15.0 million
• Deduction of EUR 3.0 million net debt: equity value EUR 9.0 to 13.0 million, core range EUR 11.0 to 12.0 million
• Ratio of upper to lower end: for enterprise value 16.0 / 12.0 = 1.33, for equity value 13.0 / 9.0 = 1.44. Because the same fixed amount is deducted from both ends, the range for the shares is proportionally wider.

A prospective buyer offers EUR 13.0 million enterprise value, 6.5 times adjusted EBITDA; for the shares, that corresponds to EUR 10.0 million. The offer lies within the overall range but below the core range. It needs to be clarified whether the bidder applies a lower multiple, adjusts EBITDA differently or defines net debt more broadly. Anyone who reads the offered EUR 13.0 million as the purchase price of the shares overestimates the shareholders' proceeds by EUR 3.0 million.

Distinction: valuation range, fair market value and pre-money valuation

• Business valuation: the process of determining value with its methods. The valuation range is one form in which the result is presented.
• Fair market value: the market value at a reference date, as required by leaver clauses in shareholders' agreements; tax law speaks of the common value (gemeiner Wert). There, a specific value has to be determined in the end, not a range.
• Pre-money valuation: the value agreed in a funding round before the capital injection. It is the outcome of negotiation, the range the preparation for it.

Common mistakes

• Mixing values from different levels. A multiples value for the whole company next to a value for the shares produces an apparently wide range that rests on a calculation error.
• Only one method. Two variants of the same calculation give a sensitivity, not a range. Only a second, independent method checks the first.
• Upper end without justification. A maximum value based on unsupported assumptions weakens the credibility of the entire calculation.
• Assumptions not disclosed. A range without the parameters that produce its ends can neither be checked nor defended in negotiation.
• Midpoint as price demand. The arithmetic mean is not a statement about the appropriate price; that follows from the characteristics of the company.

Frequently asked questions

How is a valuation range calculated?

With at least two independent valuation methods, whose results are placed side by side at the same value level. Each method delivers a lower and an upper value through scenarios and sensitivities. The overall range runs from the lowest to the highest defensible result; for the shares, equity value = enterprise value minus net debt.

How wide may a valuation range be?

There is no fixed upper limit. What matters is whether each end can be traced to a specific, documented assumption. If that is not possible, the range is not too wide but insufficiently derived.

Should the range be disclosed to the other side?

That depends on the occasion. In an auction process, the seller generally keeps its range to itself, because a stated figure can cap the bids. In a funding round, by contrast, the valuation expectation is often raised early; a well-founded range with its derivation is then more robust than a single figure.

What happens if an offer falls below the range?

Then the first step is to find the assumption on which the bidder deviates, often growth, customer churn or the definition of net debt. If it can be refuted with documents, it is negotiated; if it holds, the range shifts.

The Roemer Capital view

In sale and funding mandates, we set up valuations as a range with a complete derivation. The basis is at least two independent methods and the financial model, which we build over at least three years with a base case, a cautious case and an optimistic case. We present every range both as enterprise value and as equity value, so that the shareholders can see what actually reaches them after net debt is deducted.

In negotiation, the range serves as our test grid for incoming offers. When a bidder names a value, we trace back the assumption on which it deviates and answer it with documents from the data room. The limit price below which a deal does not make sense is set by the shareholders together with us before the process begins.