Our Business Evaluations
The foundation of our business evaluations is the ‘Earned Value Method’. In today’s European legislation a company value is determined by the sum of it’s Earned Values.
However, SUBSTANCE VALUE represents a company’s worth in the following cases:
When the majority of the company’s assets are property and equipment and therefore these material assets represent the minimum value. That is the case if the turnover / income value of the whole company is less than the substantial / material value or negative.
The EARNINGS VALUE is determined by the projection of past results for the future including deduction of all the company’s forecast revenue surpluses. In practice, this means using the classic business tool of a revenue surplus calculation. Earnings cleaned of irregular expenses have to be taken into consideration.
The revenue determined by this method is capitalized and represents the actual COMPANY VALUE. As a result, the company is the foundation for an intact source of income. This income is accomplished through fixed assets, the operational assets of products and materials inventory in particular. Additional values (e.g. receivables, partially finished services) and liabilities have to be taken into a revenue surplus base calculation as well.
The SUBSTANCE VALUE (market value of assets) is indeed a part of the total value of a company. But within the overall company evaluation it just an auxiliary function. (IDW S 1 2008) More important is the asset value from a future profitability estimation to provide a basis (profitability measure) to show an output value. It is crucial for the future of any business to have capital investment in whatever form in order to achieve an anticipated success. Furthermore, tax depreciation and interest rates can be replaced by imputed values.
GOODWILL is the value that a contractor would be willing to pay in addition to the core value, e.g. for an existing organization structure, customer base, location, brand awareness, purchase agreements, know-how, etc. Goodwill is only applicable if the revenue is higher than the Substance Value. For the evaluation of goodwill legislation recognizes the difference sum of Earned Value and Substance Value.
LIQUIDATION VALUE is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value. It’s the revenue generated from the sale / auction proceeds of a company such as inventory, technology, etc. deducted by its liabilities and liquidation expenses. The liquidation sum is to be calculated even with loss-making enterprises that have continued business. It represents the absolute lowest value limit of any company that has to be applied to companies in such a situation whatsoever. The value assumes however, that the sale is consummated by a seller who is compelled to sell and assumes an exposure period which is less than market normal.