What is a German company worth? The multiplier method for buyers
You’ve found a German company to acquire. So what is it worth, and how is the price set? The seller names one number, their advisor defends another, and you have a third in mind. At the centre of the answer is usually one method: the multiplier (Multiplikator) approach — and why the textbook version doesn’t apply cleanly to a German Mittelstand company.
The question I hear most often from foreign buyers is this one: what is this company actually worth? The discipline is called company valuation, and for small and mid-sized acquisitions the answer usually rests on a single method — the multiplier approach. This article explains how the multiplier logic works, which multiple to use when, and, most importantly, why the logic taught in the textbooks can’t be applied as-is to a German SME.
For the full picture of the acquisition opportunity and process, see Buying a Company in Germany. Here I focus on one question only: what is this company worth?
How is a company’s value calculated? The logic of the multiplier method
The logic is simple: a company’s value is its earnings multiplied by an appropriate multiple. If a company with €1,000,000 in annual operating profit warrants “a multiple of 6,” the company is worth roughly €6,000,000. That simplicity is what makes the multiplier method attractive.
The alternative — discounted cash flow (DCF), which discounts future cash flows back to today — is theoretically more rigorous but fragile in practice: it requires extensive forecasts, and changing a single assumption moves the result significantly. The multiplier method is pragmatic. So in practice it’s used either to sanity-check a DCF result, or as a direct valuation method for small and mid-sized acquisitions.
The key point: the multiple itself isn’t a fixed number. A good analyst keeps the multiple as low as possible, as high as necessary. A fast-growing company with low competitive pressure and a near-monopoly position warrants a higher multiple than a slow-growing peer under intense competition. The multiple is, in effect, a grade given to the company’s quality — the number you multiply earnings by is your judgment of how safe and sustainable those earnings are.
Which multiple: equity multiple or enterprise multiple?
Here’s a distinction most buyers skip, and it can mislead you by millions.
There are two kinds of multiple. Equity multiples (Equity-Multiplikatoren) — the best known being the P/E ratio (price-to-earnings) — give the value of equity directly, i.e. the value of the shares. Enterprise multiples (Entity-Multiplikatoren) — for example EV/EBIT — value the whole company, debt and all. EBIT here (earnings before interest and taxes, i.e. operating profit) is independent of capital structure; EV (Enterprise Value) covers both equity and net debt.
When valuing a private German SME, the right tool is usually EV/EBIT, because it lets you fairly compare two companies with different debt structures. But this method has a trap: EV/EBIT gives you the value of the whole company, not the value that ends up in your pocket. The bridge between the two is net financial debt.
Here’s how it works (figures for illustration):
Operating profit (EBIT): €1,000,000 Appropriate multiple (EV/EBIT): 6 Enterprise value (EV): €6,000,000 Less: net financial debt (Nettofinanzverbindlichkeiten): €1,500,000 Equity value (the price you pay): €4,500,000
If the same company had no debt, you’d pay €6,000,000. Ignoring net debt and just repeating “EBIT × multiple” is the most common valuation error in a German acquisition. No EV/EBIT figure means anything until you’ve stripped out the net debt on the seller’s balance sheet — bank loans, leasing obligations, minus cash.
One more note: if you ask what justifies a high multiple, the most telling measure is return on capital (ROCE, return on capital employed). A company that generates a high return on its capital warrants a higher multiple; if the return is low, the multiple should fall too. The multiple isn’t an abstract market custom — it’s a reflection of return.
Applying a multiple without adjusting EBIT: the most expensive mistake
A multiple is only as honest as the earnings you feed it. And the profit on a German SME’s official financial statement is almost never the profit you should plug directly into a multiple. In German, this cleanup is called Jahresabschlussbereinigung (normalization of the financial statements). Three items matter especially:
The owner’s salary. In most small companies the owner-manager either pays themselves a low salary and inflates profit, or draws a high salary and suppresses it. Both hide true operating performance. Before applying a multiple, you need to set a market-rate managing-director salary (Geschäftsführergehalt) — what you’d pay a general manager to replace the owner — into EBIT; this is called the kalkulatorischer Unternehmerlohn (calculated entrepreneur’s wage). This adjustment alone can move the value materially, up or down.
One-off items (Sondereffekte). A one-time litigation payout, a gain from an asset sale, a pandemic subsidy — these shouldn’t be mixed into “normal” profit. A multiple looks for sustainable earnings, not incidental items.
Hidden reserves and hidden burdens (stille Reserven / stille Lasten). An established German company’s balance sheet might carry a factory bought years ago, depreciated to nearly zero but still in use, or a plot of land that has appreciated enormously — that’s a hidden reserve. Conversely, obsolete inventory or uncollectable receivables are a hidden burden. Watch especially for structures where the operating company is sold but the real estate stays with the seller — I cover that “invisible asset” trap separately in asset deal or share deal.
In short: before debating the multiple, get clear on which profit figure you’re multiplying. Otherwise you reach the wrong answer with the right method.
If at this point you’d like to step back and talk through your own acquisition scenario, you can reach me via the contact page.
The SME adjustment: owner-dependency and the small-company discount
Now the most critical part. The best sources on the multiplier method — including Nicolas Schmidlin’s Unternehmensbewertung & Kennzahlenanalyse — approach the subject from a listed-company perspective: a peer group of comparable publicly traded companies, market capitalization, analyst forecasts, Bloomberg data. That framework is correct, but it doesn’t hold for the company you’re going to buy.
A 30-employee, single-owner metalworking shop in Schleswig-Holstein has no peer group, no market price, no analyst. So you can’t take a listed peer’s multiple and paste it onto this company. For two structural reasons, a private SME’s multiple is lower than its large listed counterpart’s:
Owner-dependency (Inhaberabhängigkeit). In a small company the owner often is the company. The most important customer relationships are on their phone, the technical know-how is in their head, the supplier’s trust is in their name. When the owner leaves, part of those earnings walks out the door too. So the official profit and the profit transferable to you are not the same thing. Non-transferable earnings pull the multiple down. In practice I assess it like this: what percentage of customers depend on the owner’s personal relationship? Is there a second tier of management? Is the owner willing to stay on for a two-year transition? The weaker the answers, the lower the multiple must go.
Small-company discount (Kleinunternehmensabschlag). Smallness is a risk in itself. Dependence on a single large customer, a narrow product range, a limited financial cushion, and — perhaps most importantly — the absence of a liquid market for the shares. You can sell a listed share tomorrow; selling an SME stake can take years. All of these extra risks show up in the price as a lower multiple for the same EBIT.
Let’s tie the two discounts to the logic: the same €1,000,000 in operating profit is worth different amounts depending on who produces it. In an institutionalized listed company that profit is safer and more transferable; in a workshop dependent on a single owner it’s riskier and less transferable. The multiple exists precisely to price that difference.
So where do you find the actual multiple figure? Sources that publish transaction multiples in Germany (sector multiple tables such as the FINANCE-Multiples, for example) give a direction — but these are usually data from larger companies. For a small, owner-dependent company it’s more realistic to start at the lower end of those tables and apply the two discounts above. There is no single “right multiple” that holds regardless of sector, quality, and size; be wary of a seller who claims there is.
Is the multiple enough on its own? Cross-checking and the floor value
No. A single multiple, on its own, can mislead. Sound valuation has two rules.
First: cross-check different methods. If you’ve done an EV/EBIT valuation, compare the result with a DCF and, where possible, with an equity multiple. The relationships between them are mathematical — for example, the fair P/E is roughly the price-to-book ratio divided by return on equity. But use these formulas to check results against each other, not to derive one multiple from another. A company’s fair P/E and fair P/B may not reconcile exactly; that’s normal. What matters is that the figures you reach independently land in a similar range.
Second: know the floor value. The multiplier method gives a “going-concern value” on the assumption the company keeps operating. Below that is a floor: the liquidation value (Liquidationswert) — what you’d be left with if the company were closed today and all its assets sold. Here you have to zero out intangibles (patents, software, licenses, goodwill) prudently, because they often can’t be sold separately. The liquidation value gives you the floor of the negotiation: a distressed seller is in a weak position when it comes to it, and usually settles for a low price. Going-concern value is your ceiling, liquidation value your floor; the negotiation runs between the two.
Frequently asked questions
How is a company valued in Germany? Two methods dominate in practice: DCF, which discounts future cash flows to the present, and the multiplier method, which multiplies earnings by an appropriate multiple. For small and mid-sized acquisitions the multiplier method usually leads; a sound valuation checks the two against each other.
What multiple is used in company valuation? There’s no fixed figure. The multiple varies by sector, growth, return on capital, and company size. The multiples of large listed companies are too high for an owner-dependent small SME — owner-dependency and the small-company discount pull the multiple down.
Should I use an EBIT multiple or an earnings multiple (P/E)? EV/EBIT is more appropriate for most private acquisitions, because it’s independent of capital structure and makes companies with different debt structures comparable. But EV/EBIT gives the value of the whole company; to reach the price you’ll pay, you have to subtract net financial debt.
Why is the seller’s asking price so high? Usually because it’s calculated on unadjusted profit (owner’s salary not added back, one-off items not stripped out) and with the multiple of large listed companies. When you normalize EBIT and apply the SME discounts, the picture usually changes.
The multiplier method isn’t just a calculator; it’s a series of judgments about which profit you multiply, by which multiple, with which discounts applied. A small error in any of these judgments turns into a large difference in the price. If you’re evaluating a specific company in Germany and want to review the assumptions behind the numbers together, you can reach me via the contact page.