There is no single correct answer to the question of what a company is worth. Each buyer assesses future earnings and their risk from their own perspective, and the price is ultimately settled in negotiation. Owners who understand how the numbers are built can judge offers better and set realistic expectations.
Value and price are not the same
The Institut der Wirtschaftsprüfer (IDW), the German institute of public auditors, describes the value of a company as the present value of the future financial surpluses it will generate as a going concern. It draws an equally clear line between that value and price: prices actually paid can differ from the calculated value and are used in a valuation as a plausibility check. When an auditor advises a seller, the task is to determine the minimum the seller must ask in order not to be worse off. On the buyer's side, the question is the maximum price. The purchase price settles somewhere in between.
The central standard for company valuations in Germany is IDW S 1, "Principles for the Performance of Business Valuations". The IDW published a revised version in April 2026 (IDW S 1 i.d.F. 2026). Auditors apply these principles on many different occasions, from purchases and sales to shareholders joining or leaving and the settlement of estates. In sale negotiations in the Mittelstand, however, buyers usually work with simpler calculations.
The common methods
Multiples
In sale discussions, sellers mainly encounter the multiples method. A sustainable earnings figure, usually EBITDA (earnings before interest, taxes, depreciation and amortisation) or EBIT (earnings before interest and taxes), is multiplied by a factor derived from comparable transactions or from market participants' estimates. The method is quick and close to the market, but crude. For capital-intensive businesses, EBIT is often more telling because it reflects depreciation and therefore the ongoing need for replacement investment.
How widely multiples vary by sector is shown by the FINANCE Multiples that KfW Research reproduces for companies with revenue below €20 million (as of November 2025; revenue multiples based on transactions and expert estimates). The range runs from 0.25 to 0.50 times annual revenue in construction and skilled trades, through 0.46 to 0.69 times in mechanical and plant engineering, to 1.33 to 2.30 times in software and IT services. These figures are no more than a rough guide. KfW Research also notes that there is neither a generally accepted scheme for setting purchase prices nor a single multiple that applies across sectors.
Capitalised earnings and discounted cash flow
The capitalised earnings method (Ertragswertverfahren) and DCF methods discount expected future earnings or cash flows at a rate that reflects the risk. They rest on a business plan which, as the IDW describes it, often covers three to five years in detail and then extrapolates a sustainable year. These methods capture a company's particular features more precisely than a multiple. They are, however, sensitive to the discount rate and to the assumptions for the period after the plan.
The value for tax purposes
This needs to be distinguished from the value used for German inheritance and gift tax. Among other approaches, the German Valuation Act (BewG) provides a simplified capitalised earnings method in which, at its core, the sustainable future annual earnings are multiplied by a statutory factor, currently 13.75, provided this does not produce obviously incorrect results (sections 199, 200 and 203 BewG). The result can differ considerably from what a buyer would pay. Whether and how it applies in a given case is a question for a tax adviser.
Normalisation: from reported to sustainable earnings
A buyer does not value the profit shown in the annual accounts but the profit the company can sustain under new ownership. Several items are therefore adjusted. Typical examples are the owner's salary, which is compared with what a salaried managing director would cost; one-off income and expenses such as a concluded legal dispute; private costs run through the company; and rent for property owned by the owner or the family. If that rent is below market level, the buyer will assume a market rent, and earnings fall. Every adjustment must be documented, because the buyer will later examine it in detail.
| Hypothetical example, € thousand | Amount |
|---|---|
| EBITDA as reported in the annual accounts | 2,400 |
| Owner's salary above the level of a salaried managing director | +150 |
| One-off costs of a concluded legal dispute | +120 |
| Private vehicle and travel costs | +40 |
| Rent paid to the owner below market level | −90 |
| Normalised EBITDA | 2,620 |
From enterprise value to the price for the shares
A multiple applied to EBITDA gives the value of the operating business regardless of how it is financed (enterprise value). Mittelstand deals are mostly negotiated on a cash-free, debt-free basis: in arithmetical terms, the buyer takes over the company without financial debt and without surplus cash. Bank debt, shareholder loans and debt-like items such as pension provisions are therefore deducted from the enterprise value, and freely available cash is added. What counts as debt-like is often a matter for negotiation.
Working capital comes on top. The buyer expects inventories, receivables and trade payables to be at a level that is normal for the business at handover. If working capital is below that level, the price falls; if it is above, the price rises. How this adjustment is handled technically at the reference date is part of structuring the purchase price.
| Hypothetical example, € thousand | Amount |
|---|---|
| Assumed enterprise value | 12,000 |
| Bank debt | −2,500 |
| Pension provisions | −600 |
| Freely available cash | +1,100 |
| Working capital below normal level | −300 |
| Price for the shares (equity value) | 9,700 |
What drives the value of smaller companies
For companies with EBITDA of €1 to 5 million, what matters is less the level of earnings than how reliable they are. A buyer translates every risk into a lower multiple, a discount or a part of the price that is only paid later.
- Dependence on the owner: if customer relationships, sales or technical know-how rest with one person, earnings without that person are uncertain.
- Customer concentration: if a large share of revenue comes from a few customers, losing a single one can change earnings noticeably.
- Recurring revenue: maintenance contracts, framework agreements and subscriptions make the plan more dependable than pure project business.
- Second management level: a team that runs day-to-day operations independently reduces the transition risk.
- Investment backlog: deferred investment in machinery, buildings or IT will be set off by the buyer, who has to catch up on it after the purchase.
- Quality of financial reporting: timely monthly figures and a track record of meeting the plan reduce uncertainty and with it the risk discount.
Why multiples from the financial press rarely fit
The multiples reported in the business press mostly come from transactions involving large or listed companies. These are more diversified, less dependent on individual people or customers, and of interest to far more buyers, including international ones. Their acquisitions are also easier to finance. For a company with EBITDA of €1 to 5 million, the pool of buyers is smaller, financing is tighter and the individual risks are higher. Providers of benchmark data such as the FINANCE Multiples therefore report their figures separately by size class, from companies with revenue below €20 million up to those with €250 million or more. Applying a headline multiple to one's own company easily leads to expectations that are too high.
A realistic range rather than a single figure
What helps is a value range based on properly normalised earnings, a credible plan and an honest view of the risks. With that range, offers can be assessed before negotiations begin. The tax consequences of a sale depend on the individual case and should be clarified with a tax adviser beforehand.
This article is for general information only and does not replace legal, tax or financial advice on your specific situation.