Why value a company?
Valuing a company means establishing a defensible value range at a given date. This exercise becomes essential as soon as a decision commits capital: selling your business, welcoming an investor, bringing in a partner or settling a dispute. Without a rigorous valuation, a negotiation rests on intuition rather than on method.
Four contexts call for a serious valuation, and each one shifts the cursor. In a sale, the seller seeks the highest defensible price while the acquirer hunts down every fragile assumption: the value retained arbitrates this tension. In a fundraising round, the issue is not only the amount raised but the dilution accepted; valuing a scale-up at EUR 8M rather than EUR 6M mechanically changes the percentage given up for EUR 2M of fresh money.
Bringing in a partner follows the same logic but with a continuity constraint: the value serves as the basis for a shareholders' agreement that will govern future exits, so it must hold over time. Litigation, on the other hand, changes everything: a separation, a succession or a conflict between shareholders places the valuation under the scrutiny of a judicial expert or a court. The method must then be traceable, documented and reproducible, because it will be contested step by step.
- Sale or transmission: arbitrating the tension between the seller's price and the acquirer's prudence.
- Fundraising: the valuation determines the dilution, not only the amount raised.
- Bringing in a partner: anchoring a stable value base for the shareholders' agreement.
- Litigation or succession: producing a traceable value, enforceable before a third party.
- Context precedes method: the same company is not valued the same way depending on what is at stake.
DCF: the discounted cash flow method
The DCF (discounted cash flows) values a company by its ability to generate future cash. You project the free cash flows over five to ten years, bring them back to their present value via the WACC (weighted average cost of capital), then add a terminal value that captures the company's life beyond the explicit horizon.
The projection starts from free cash flow: operating profit after tax, increased by depreciation, reduced by investments and by the change in working capital requirement. This flow is what actually remains available, not the accounting profit. The WACC is calculated as WACC = (FP/V)·rFP + (D/V)·rD·(1−TC), where FP denotes equity, D the debt, V their sum, and TC the tax rate that makes the debt partially deductible. The cost of equity rFP is obtained through the CAPM: risk-free rate plus beta multiplied by the market risk premium.
The terminal value often weighs 60 to 75% of the total value, which makes it the most sensitive point. The Gordon formula is written terminal value = FCF·(1+g)/(WACC−g), where g is a prudent perpetual growth rate (generally 1.5 to 2.5%, never higher than long-term economic growth). A sensitivity analysis is non-negotiable: varying the WACC by plus or minus 1 point and g by plus or minus 0.5 point produces a range, and it is this range, not a single figure, that constitutes the true result of a DCF.
Multiples: EBITDA, revenue, comparables
The multiples method values a company by comparing it to similar transactions or listed companies. You apply to a financial aggregate (most often the EBITDA) a multiple observed on the market: an EV/EBITDA of 7 on an SME generating EUR 1.2M of EBITDA gives an enterprise value of EUR 8.4M, from which you subtract the net debt.
The choice of multiple depends on maturity. EV/EBITDA dominates for profitable and mature companies because it neutralizes depreciation and financing policies. The revenue multiple is used when the result is still weak or volatile, typically for a scale-up that reinvests all of its margin. The comparables base must remain credible: companies from the same sector, of comparable size and operating in nearby markets. A multiple borrowed from listed giants almost always overvalues a Belgian or Luxembourg SME.
Normative adjustments separate a serious valuation from a mechanical calculation. The EBITDA must be restated for non-recurring items (an exceptional dispute, a capital gain on a sale) and for off-market executive compensation, frequent in family-owned structures where the manager pays themselves little or a lot for tax reasons. Finally, an illiquidity discount of 20 to 30% often applies to an unlisted SME, because its shares cannot be resold in one click like a stock on the exchange.
- EV/EBITDA: the reference for mature and profitable companies.
- Revenue multiple: useful when the result is weak, negative or too volatile.
- Comparables: same sector, similar size, similar market; avoid listed giants.
- Normative restatements: neutralize non-recurring items and off-market executive compensation.
- Illiquidity discount: 20 to 30% frequent for an unlisted SME.
Asset-based method and goodwill
The asset-based method values a company by what it owns rather than by what it generates. You start from the revalued net assets (ANR): you take each asset and each liability at its current market value, and not at its historical book value. This approach prevails for holdings, real estate companies and companies rich in tangible assets.
Revaluation corrects the blind spots of the balance sheet. A building acquired twenty years ago often appears at a historical cost far below its real value; an obsolete inventory, conversely, must be written down. The ANR is therefore calculated as the sum of the revalued assets reduced by the revalued liabilities. For a real estate company holding a property portfolio of EUR 12M in market value and EUR 4M of debt, the ANR comes out at EUR 8M, independently of what the income statement says.
Goodwill bridges the gap between the ANR and the real economic value of a profitable company. A company can be worth more than its net assets because it generates a profitability higher than the sector norm: a loyal client portfolio, a brand, know-how. You then capitalize this excess profit (the result beyond a normal compensation of the capital employed) to obtain the goodwill, which you add to the ANR. For a low-capital but highly profitable services business, this goodwill can represent most of the value: this is why the pure asset-based method almost always underestimates this type of company.
Which method in which context?
No method imposes itself universally: the right choice depends on the size, the sector, the maturity and the transaction context. Institutional practice always crosses at least two approaches and confronts their ranges. When DCF and multiples converge, the value is robust; when they diverge strongly, the gap reveals an assumption to question.
Maturity guides the choice first. A profitable and predictable company lends itself to the DCF, which values its cash trajectory. A loss-making but fast-growing scale-up is better valued by revenue multiples or by methods dedicated to startups, the DCF becoming too sensitive to uncertain projections. A holding or a real estate company falls under the asset-based approach, because its value resides in its assets, not in an operating flow.
The sector and the context then refine it. A highly profitable but low-capital services activity calls for DCF and multiples, the ANR alone undervaluing it. The transaction context, finally, shifts the result: a sale favours multiples from comparable transactions (what acquirers have actually paid), while litigation requires a traceable and conservative method, enforceable before a court.
- Profitable and predictable SME: DCF as the central method, multiples as a control.
- Fast-growing scale-up: revenue multiples or startup methods, DCF as a prudent backup.
- Holding or real estate company: revalued net assets as a priority.
- Profitable low-capital services: DCF and multiples, never the ANR alone.
- Sale: multiples from comparable transactions; litigation: traceable and conservative method.
10 classic valuation mistakes
Most flawed valuations are not due to a wrong formula but to poorly calibrated assumptions. A WACC that is too low, an unrealistic perpetual growth or synergies counted twice are enough to distort the result by 30% or more. Knowing these pitfalls allows you to challenge any valuation, including the one presented to you.
- Poorly calibrated WACC: a cost of capital underestimated by one point can inflate the value by 15 to 20%; the beta and the risk premium must reflect an SME, not a large listed company.
- Optimistic projection: extending double-digit growth over ten years without inflection; economic reality imposes a convergence towards market growth.
- Excessive perpetual growth rate: a g higher than 2.5% makes the terminal value explode and assumes, to infinity, growth faster than the economy.
- Double-counting of synergies: building into the price gains that only the acquirer can achieve amounts to making them pay for their own added value.
- Confusing enterprise value and equity value: forgetting to subtract the net debt from the EV mechanically overvalues the share price.
- Non-comparable multiples: applying a listed company multiple to an illiquid SME, without a discount.
- Working capital neglected: ignoring the working capital requirement in the free cash flow overestimates the cash actually available.
- Non-normalized EBITDA: keeping non-recurring items or off-market executive compensation.
- Single method: relying on a single calculation without confronting it with a second approach.
- Single value announced: presenting a figure instead of a range, when every valuation is a confidence interval.
Practical case: valuing a Belgian SME
Let us take a fictional and purely illustrative SME: a B2B services company based in Brussels, generating EUR 5M of revenue, growing steadily at 5% per year. The figures below are simplified assumptions intended to illustrate the method, not a real case. The objective: to arrive at a value range by crossing DCF and multiples.
The starting assumptions: EBITDA of EUR 0.8M (margin of 16%), annual investments of EUR 0.1M, change in working capital requirement of EUR 0.05M, and a corporate tax of 25%. The initial normative free cash flow comes out around EUR 0.5M. On the cost of capital side, we retain a WACC of 11%, consistent for an SME of this size (moderate risk-free rate, sector beta, risk premium, plus a small-size premium). The perpetual growth rate g is prudently set at 2%.
By DCF, we project the free cash flow over five years with growth of 5%, then we apply the Gordon terminal value: 0.64·(1.02)/(0.11−0.02), or about EUR 7.3M to discount. After discounting all the flows and the terminal value, the enterprise value is established around EUR 5.5M. By multiples, an EV/EBITDA of 6 to 7 (consistent for mature services) applied to EUR 0.8M gives an enterprise value of EUR 4.8M to 5.6M.
The two approaches converge towards an enterprise value of EUR 4.8M to 5.6M. By subtracting a hypothetical net debt of EUR 0.5M, the equity value is established in a range of EUR 4.3M to 5.1M. This convergence validates the robustness: if the DCF had given EUR 8M and the multiples EUR 4M, it would have been necessary to reopen the growth or WACC assumptions before advancing the slightest figure in negotiation.
- Assumptions: revenue EUR 5M, EBITDA EUR 0.8M, growth 5%, WACC 11%, g 2%.
- DCF: enterprise value of about EUR 5.5M.
- Multiples (EV/EBITDA 6 to 7): enterprise value of EUR 4.8M to 5.6M.
- Convergence of the two methods: enterprise value of EUR 4.8M to 5.6M.
- Final equity range (net debt of EUR 0.5M deducted): EUR 4.3M to 5.1M.