Discover the intrinsic value method for business valuation

When you are planning on acquiring or selling a business, it is important for both parties to know the value of the company in question. The intrinsic value method is a reliable form of business valuation. The intrinsic value calculation provides an objective picture of the actual financial health of a company and forms the basis for a well-considered decision. It is also widely used to calculate share value and makes it possible to get to a fair rate. In this article, we will take a closer look at the intrinsic value calculation and its advantages.

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What does an intrinsic value calculation entail?

Simply put, the intrinsic value method consists of a company’s total assets minus all outstanding debts. The result is the actual value of the company. However, it is important to know the difference between the calculation of intrinsic value and equity. Equity is often based on book value, whereas intrinsic value also takes intangible assets into account. Think of goodwill, for example.

The calculation involves the actual value, expressed in monetary terms, that is present in the form of company assets. These can include the company premises and machinery, inventories, shares and other assets. Debts include the company’s financial obligations. Are you calculating the intrinsic value of a company? Then these components are compared in a detailed analysis. This is a very reliable starting point, particularly in the case of mergers and acquisitions.

Calculating intrinsic value of a company

To give you a clear picture of calculating intrinsic value of a company, we provide a simple example below.

The operational activities of the company being sold can be assigned a total value of €1,800,000. The total debts amount to €800,000. This leaves an intrinsic value of €1,800,000 – €800,000 = €1,000,000.

Is the company being sold to the current management in the form of shares? Then the value of these is also easy to calculate. Suppose there are 400 shares. Then the value per share is: €1,000,000 / 400 = €2,500. This is then taken into account in the negotiations.

In theory, however, the intrinsic value calculation often involves a complex process, in which investors want a clear insight into the potential of the company. That is why we often fall back on the DCF method. This popular method uses past and expected cash flows to determine future profitability. This is obviously a very important factor for both the buyer and seller to get to at a realistic selling price. Unfortunately, this intrinsic value calculation is very time-consuming. Outsourcing to an external party with expertise in this area would therefore be a wise choice.

What other methods are there besides the intrinsic value method?

The intrinsic value calculation does not always offer the ideal solution for a business valuation, because it depends on historical data and only provides a snapshot. Depending on the situation and the information available, there are other, better methods that can be used such as the DCD method, multiple methods such as EBIT and EBITDA, or the profitability calculation. These calculations also take the future into account, which shows whether an investment is attractive or not. This provides a complete insight for the final negotiations.

Calculate intrinsic value with BrightOrange

At BrightOrange, we have specialised in providing accurate business valuations for over 25 years. Our consultants and partners have the knowledge and experience to find the perfect solution in every situation. Would you like to have us calculate intrinsic value or do you have any questions about intrinsic value calculation? Feel free to contact our experts for more information.