Special features of the valuation of microenterprises
Sole proprietorship, many questions and some answers
Micro or small enterprises are the most common form of SME in Switzerland: Nearly 90% of all companies employ fewer than ten people. When valuing companies of this size, emotions are often higher than the available budgets. Negotiations about the price then quickly replace any methodical discussion about a company valuation.
However, “pricing” rather than “valuation” only serves the parties if they agree or have to agree, as is the case in a real sale. The situation is different in the case of so-called dominated valuation events: In the case of divorce or inheritance disputes, a fair agreement must also be found for parties facing each other with different lengths of spikes. In these cases, the legislator provides more or less precise guidelines and, in the end, a court ensures a balance of interests.
Such legally required valuations almost always involve the estimation of a “market value”. According to the Federal Supreme Court, this is “the value that could normally be achieved in the course of a sale in the ordinary course of business. The decisive factor is therefore a technical or legal-objective approach and not a subjective-economic approach”. Thus, an area of agreement must be assumed, a price determination must be simulated.
Trustees and consultants are often active here as arbitration experts and are to estimate a value mediated between both sides (arbitration value). This must be done impartially and thus without taking into account the concrete personal – i.e. subjective – circumstances. Assumptions are therefore necessary. In valuation theory, this is also referred to as objectifying valuation. This is so interesting and challenging because here “the entire […] keyboard of scientific knowledge is drawn upon”. This sometimes leads to irritation, especially in the pragmatically working SME world: a “tragic case of unrequited love”. In this respect, a worthwhile subject for this year’s Finance and Accounting Yearbook.
In the following article, we address special features of micro-enterprises and show how these can be taken into account in a valuation. We take as our starting point the ideal of a legally required estimate of the fair market value of a micro-enterprise run as a sole proprietorship, for example in the event of a divorce. In this situation, answers that are as defensible and court-proof as possible must be found for all questions. Simplifications and shortcuts for application cases deviating from this will then be found by valuation practice on its own.
Methodologically, we assume best practice, i.e. a valuation with a DCF method. Of course, this does not exclude other methods – practitioner method or multiples. However, we are convinced that a transparent and thus also communicable valuation is best achieved with a DCF method. If other methods are used, it must nevertheless be possible to answer the questions we have raised.
Read the full article from the 2022 Finance and Accounting Yearbook here.