What is Your Business Worth? Three Valuation Methods and What Comes Next

23.05.26 – Frankfurt am Main

What is a mid-market business worth? The answer is rarely straightforward. It depends on the method applied, the data available, and who ultimately steps forward as the buyer. A well-founded valuation is therefore more than a number. It is an analytical framework that helps owners develop realistic expectations, prepare a structured sale process, and negotiate from an informed position.

Three valuation methods are applied regularly in practice in the German Mittelstand. The Ertragswertverfahren, the capitalised earnings method standardised under IDW S1; the Discounted Cash Flow (DCF) method, internationally established; and the multiples method, market-based and transaction-oriented. Each method provides its own perspective on enterprise value. Which price is ultimately realised, however, depends on a further factor that goes beyond analytical valuation: the structured competition between several qualified bidders.

The Ertragswertverfahren

The Ertragswertverfahren is the established standard for company valuations within the German legal framework. It follows IDW S1, the valuation standard issued by Germany’s Institute of Public Auditors (Institut der Wirtschaftsprüfer), and rests on the principle that the value of a company is determined by its future earnings capacity.

In practical terms, the sustainable earnings of a company are projected and then discounted to the valuation date using a capitalisation rate. This rate reflects the risk of the business model, the prevailing interest rate environment, and a sector-specific and company-specific risk premium. What qualifies as “sustainably attainable” emerges from a careful adjustment of historical earnings for one-off effects, together with a well-founded plan for the coming financial years.

The particular strength of the method lies in its legal recognition. In cases of inheritance and gift tax, in company law valuation contexts, and in litigation, the Ertragswertverfahren is the preferred method of German tax authorities and courts. For owner-led mid-market businesses, where a sale is often connected with inheritance-tax considerations, this recognition is not a side issue. It provides the basis on which the valuation remains defensible beyond the transaction itself.

The Discounted Cash Flow Method

The DCF method follows a logic similar to that of the Ertragswertverfahren, but replaces the valuation input. What is projected are the free cash flows of the company, and what is applied as the discount rate is the weighted average cost of capital, or WACC. The WACC reflects the average cost of equity and debt capital, making the company’s financing structure an explicit part of the valuation.

In international valuation practice, the DCF method is the standard. Financial investors, international corporates, and investment banks predominantly work with DCF models, because the cash flow perspective gives a clearer view of actual liquidity development and, consequently, of the refinancing capacity of an acquisition. In cross-border transactions, DCF is also the methodological common ground on which buyers and sellers operating in different legal frameworks can agree.

For Mittelständler considering a sale to an international strategic acquirer or a financial investor, it is therefore worthwhile to prepare the valuation in DCF format alongside the Ertragswertverfahren. Both methods typically lead to similar, though rarely identical, results. The difference itself becomes a valuable point of discussion in negotiations, because it surfaces the methodological assumptions behind each value.

The Multiples Method

The multiples method follows a fundamentally different approach. It draws enterprise value from market data: comparable transactions or listed peer companies in the same sector provide the reference point. A sector- and size-dependent multiple is then applied to an appropriate base figure, typically EBIT or EBITDA, occasionally revenue or an operational metric such as customer count.

The advantages of the method lie in its market relevance and speed. An indicative valuation can be prepared in a matter of hours, provided the necessary comparable data are available. The method also offers a direct connection to actual market reality. It shows what buyers in comparable situations have in fact been willing to pay.

The limitation of the method lies in comparability. Two mid-sized companies in the same sector may differ significantly in size, margins, customer structure, growth perspective, and dependence on the owner. Current and transparent transaction data in the German Mittelstand are also not always available at the desired level of depth. The multiples method therefore works best as a plausibility check alongside a well-founded earnings or DCF valuation. As a stand-alone method, its limitations become apparent.

Structured Competition

All three valuation methods share one characteristic. They determine an analytical range within which enterprise value is plausibly situated. They do not determine the price that will actually be realised. That gap is closed only by the structured competition between several qualified bidders.

Experienced advisors approach multiple potential buyers in parallel and on an anonymised basis. A bilateral negotiation with a single interested party frequently leads to an offer below the realisable value, because the seller lacks a point of comparison. The anonymised initial outreach withholds identifying details. Only after a review of strategic fit, financial standing, and interest do selected candidates receive further information, typically following the signature of a confidentiality agreement.

This staged release of information serves two purposes. It protects the seller in the sensitive early phase against the uncontrolled disclosure of the sale intent, which would otherwise unsettle customers, suppliers, and employees and weaken the negotiating position. And it creates comparability. Several serious interested parties value the company under identical conditions and submit comparable offers. An uncertain option becomes several concrete options. “Value maximisation does not happen by chance. It arises from structure, competition, and professional negotiation”, summarises Christo Ntafopoulos Economou, Co-Managing Director of Edelweiss Corporate Finance.

The comparison also makes it possible to look beyond the headline purchase price at other negotiating dimensions. Payment terms, transition arrangements, the treatment of employees, the future of the location, and the reliability of the acquirer all flow into the overall assessment of offers. In the Mittelstand, these criteria are seldom incidental. They are often the actual yardstick for the decision.

Value Arises Through Preparation

Three valuation methods and a structured competition can only deliver their effect when the company has been properly positioned before the sale process begins. Weaknesses must be addressed, structures sharpened, and capabilities strengthened. This covers very different areas. The clean separation of private and business assets, the reduction of the business’s dependence on the owner, the preparation of consistent accounting records, the establishment of a second management layer, and the strategic positioning of the business model for buyer outreach all belong here in equal measure.

Professional preparation typically takes between two and four years. Experience consistently shows that those who sell under time pressure achieve considerably less than the actually attainable market value. The preparation period is the phase in which the conditions are created for the valuation methods to exploit their highest range and for competition to develop its true effect.

Those who start early sell better. A well-founded valuation at the start of this preparation is the first and perhaps most important investment in a successful sale. It combines realistic expectations with a defensible data base and creates the conditions for an owner’s life’s work to be handed over in a manner that reflects decades of investment.