# How should I calculate my company's profit

## Company value: key figure for company valuation

The company value corresponds to a monetary value that can be determined on the basis of various methods. A purchase price can be derived from the company value or a company learns from this how much it can be worth on the market. However, the company value does not have to correspond to the price of the company or the market value.

When is the company value important?

The value of a company plays a role in different situations:

• Sale of the company: If a company is sold, the company value is an important guide for a possible sale / purchase price.
• Sale of individual company components: In the case of a sale of company components, the company value must be known so that a price can be derived for the individual parts.
• Takeover of a company: If, for example, a stock corporation wants to take over another company, the value of the takeover candidate is determined first.
• Taxation of Takeovers: If parts of the company are taken over, taxes may be due based on the company's value.
• Inheritance and gifts: If a company is handed over to heirs, it must be determined how much the company is worth. Only in this way can the heirs be paid out in the parts specified in the will.
• Stock trading: The value of the shares is set in relation to the current market value or company value of a company.
• Payment of severance pay to resigning shareholders: In order to pay off shareholders who leave a company, a specific value must be determined for a company.

### Calculation of the company value

Basically, there is no such thing as one, objective company value. While the owners also take into account their own work that they have invested in the company when calculating the value, only the material value usually counts for the buyer. If a calculation is carried out, various aspects must usually be taken into account in order to obtain a value that is as objective as possible.

### Calculation with calculators

In order to get an initial assessment of the value of your own company, calculators can be used on the Internet. Many of these offers are free. They are usually offered by management consultants who can give potential customers some pointers in advance for determining the company's value.

The calculators can be used by anyone, including private individuals, who want to determine the value of companies using publicly available data, for example via the Federal Gazette or the annual reports of stock corporations.

A company value calculator on the Internet is usually based on the common methods for company valuation.

### Common procedures

In practice, two common methods are used to determine the value:

1. Earned value method: The capitalized earnings method takes into account what can be earned with a company in the future. For the calculation, the income is divided by the capitalization interest rate. The interest rate itself takes into account possible interest rates for a conventional investment as well as a premium for the entrepreneurial risk associated with the investment. The interest rate is based on a possible investment that the buyer could use instead of buying a company.
2. Ebit method: In this valuation procedure for companies, the annual profit (EBIT) is multiplied by a special factor. The factor is related to the respective industry as well as the debt of the company. If a company achieves an annual net income of 100,000 euros and the factor is 4, the company value would be 400,000 euros according to the Ebit method.

### Other factors

• Making a forecast: Especially with the income approach, a plausible prognosis for the development of income must be made. Both opportunities and risks of the company, the industry or the products offered are taken into account.
• Investment and sales planning: The income capitalization method also takes into account, for example, possible developments in sales figures or investment costs over the next five years.
• Type of company management: When considering the company's value, it plays an important role how the company depends on the management. This ensures, for example, for buyers that the company they have bought will continue to operate without any problems after a change of ownership.
• Type of products and services: In this case, the market position of the offer is checked. As a rule, the higher the unique selling proposition of the products and services, the higher the company value.
• Extent of the customer base: A solid customer base with a reasonable growth rate can add significant value to a company.

### Example for calculating the company value

An investor wants to buy a company whose sustainable income is 350,000 euros. The two managing directors receive a wage of 100,000 euros per year.

They indicate a possible return on capital of 15 percent. So the sellers have to calculate how much capital an investor would have to bring with him in order to achieve a return of 250,000 euros with an interest rate of 15 percent.

The calculation is derived from the interest formula "Interest = capital × (interest rate ÷ 100)". It looks like this:

Capital = Interest Amount ÷ (Interest Rate ÷ 100)
Capital = 250,000 ÷ (15 ÷ 100) = 1.66 million

In this case, the company value according to the income approach would be 1.66 million euros if the buyer assumes an interest rate of 15 percent.

Have company value calculated

Management consultants, tax consultants or other service providers can professionally calculate the value of a company. How high the costs are depends on various factors. On the one hand, the size of the company and the complexity of the company decide the price for a company valuation. On the other hand, it depends on which service provider does the calculation.

### Market value and intrinsic value to determine the value

In some cases, the market value or the intrinsic value can also be used to value the company.

### Market value

In the case of listed companies, the market value is often assumed to be the company value. This value usually corresponds to the stock market value of a stock corporation. The valuation is based on supply and demand. A low demand can then cause the market value to drop significantly.

What is special about the market value is that it does not necessarily have to correspond to the intrinsic value or the earnings value. A company that is strong on the stock exchange can have a high market value, but its intrinsic value can be significantly lower. You can find six of the most expensive start-up exits here.

### Intrinsic value

Companies can also be classified based on their intrinsic value. This approach assumes how much capital would be required to rebuild the existing company exactly the same. For this purpose, the current market value of tangible, intangible, and operationally essential and non-operational assets is determined. Schools or company liabilities are subtracted from this.

When calculating the intrinsic value, the determination of intangible assets usually causes difficulties. For this reason, only material assets are usually taken into account in practice.

### How do company value and price differ?

The company value is the value of a company, which is determined as objectively as possible on the basis of a calculation method. The price of the company is ultimately the amount that a buyer wants to spend on the company or a seller asks to take over the company. Company value and price do not have to be the same.

### What benefit does the company value correspond to from the point of view of benefit theory?

If the benefit theory is applied, the company value is based on the subjective benefit that an owner derives from the company.

### What is the company value from an investment theory point of view?

According to investment theory, the company value corresponds to the price, which relates to the possible returns in the future. This fact becomes particularly clear with the income capitalization method. Because there the investor actually wants to know how much profit he can achieve with the company with an assumed interest rate.

### When are the company value and price of a company the same?

The price of a company corresponds to the company value if a buyer is willing to pay the value determined with the help of a valuation process in money form.

### What is the process of determining company value called?

The determination of the company value is often equated with the term "company valuation".

### What influences the company value?

The value of a company can be increased by its substance. For this reason, the net asset value method is also used in some cases to determine the value. The value of a company increases, for example, when new machines are used or the company owns its own real estate. The same applies to products that are market leaders or have a special unique selling point. A company's location can also affect its value.

High schools, low investment power and uncompetitive products and offers can in turn reduce the company's value.

### What do follow-up exchanges bring on the Internet?

If you want to sell your company, you can do so via so-called "successor exchanges" on the Internet. These exchanges also offer interested buyers the opportunity to search for a company. In practice, sales people in particular should take care to charge a reasonable price for their business. Buyers are advised to carefully examine the offers. Because precisely because of the non-binding nature of the Internet, there are always fraudulent offers.