To value a company, you need to assess its assets, profitability and future financial prospects. In Switzerland, commonly used approaches include asset-based valuation, earnings-based valuation and the practitioner's method (Praktikermethode). The most suitable method depends on factors such as the company's size, industry and the purpose of the valuation.
If you're planning to sell your business, arrange a succession or attract new investors, understanding what your company is worth is essential.
In this guide, we'll explain how to estimate the value of your SME, which valuation methods are commonly used in Switzerland and what you should consider when assessing your company's value.
How do you value a company? The SME Guide
What is your business actually worth? Many Swiss SME owners don't have a clear answer until they decide to sell, plan their succession or bring an investor on board. At that point, getting the numbers right becomes essential.
So, how do you determine a company's value?
There is no single formula that works for every business. Instead, valuation generally considers two key perspectives: what the company owns (its net assets) and what it earns (its profitability). For Swiss SMEs, there is also a practical approach that combines both perspectives.
In this article, we'll walk you through three essential steps to valuing a company, explain which methods make sense for smaller businesses and highlight common mistakes to avoid.
How to Value a Company: 3 Essential Steps
Before calculating your company's value, there are three important things to consider.
1. Define the Purpose of the Valuation
Are you planning to sell your business, transfer ownership to a successor, bring in investors or simply understand its current value?
The purpose of the valuation determines how detailed the analysis needs to be and how well the resulting figure must stand up to scrutiny during negotiations.
2. Choose the Right Valuation Method
The most common approaches include asset-based valuation, earnings-based valuation and a combination of the two, known in Switzerland as the practitioner's method.
The right approach depends on your company's industry, size, financial structure and the information available.
3. Review and Adjust Your Financial Figures
Before calculating anything, review your balance sheet and income statement.
You may need to adjust for one-off income or expenses, private or owner-related transactions, and hidden reserves.
Without properly adjusted financial figures, even the most sophisticated valuation method can produce misleading results.
The following sections explain the two fundamental valuation approaches before showing how they can be combined for smaller Swiss businesses.
Asset-Based Valuation: What Does Your Company Own?
Asset-based valuation, known in Switzerland as the Substanzwert method, determines a company's value based on its adjusted net assets.
This includes the company's assets, adjusted to reflect their economic value, including hidden reserves. Liabilities and any deferred taxes associated with those hidden reserves are then deducted.
An important distinction is that asset-based valuation provides a snapshot of the company's financial position at a specific point in time.
It does not tell you whether the business is profitable or has strong future growth potential.
Factors such as profitability, market position, current business performance, growth opportunities and market conditions are not directly reflected in this approach.
From a buyer's perspective, understanding a company's assets is important, but it is rarely enough to determine a fair value on its own.
When Is Asset-Based Valuation Useful?
This method is particularly relevant for asset-heavy businesses, such as companies that own significant property, machinery or equipment.
It provides a useful starting point for understanding the value of what the company owns.
Asset-based valuation is also an essential component of the practitioner's method, a well-known approach in Swiss SME valuation.
Earnings-Based Valuation: How Much Can Your Company Generate?
Earnings-based valuation focuses on a company's ability to generate profits in the future.
The starting point is a financial performance measure, such as net profit, EBIT (earnings before interest and taxes) or cash flow, depending on the valuation approach.
The principle is straightforward: a business is treated as an investment.
As with any investment, its value depends on the returns it can generate and the risks involved.
Expected future earnings are therefore assessed against a required rate of return to estimate the company's value.
Example: Calculating a Company's Earnings Value
Let's assume a Swiss company generates a sustainable annual net profit of CHF 200,000.
If the required rate of return is 10%, a simplified earnings-based valuation would be:
CHF 200,000 ÷ 10% = CHF 2,000,000
Based on these assumptions, the company's estimated earnings value is CHF 2 million.
This simplified calculation assumes that the profit can be maintained over the long term and that the selected rate appropriately reflects the company's risks.
Unlike asset-based valuation, the focus here is not primarily on the company's physical assets.
Instead, the central question is:
How much profit can this business sustainably generate, and what return can an investor reasonably expect?
Business Valuation for Small Companies: What Really Matters?
For many SMEs, neither asset-based valuation nor earnings-based valuation provides a complete picture on its own.
At the same time, building a detailed discounted cash flow (DCF) model, commonly used for larger companies, may require more time and resources than a small business valuation justifies.
In Switzerland, two more practical approaches are often considered.
1. The Practitioner's Method (Praktikermethode)
The practitioner's method combines asset value and earnings value into a weighted average.
In its traditional form, the earnings value receives twice the weight of the asset value.
The formula is:
Company Value = (Asset Value + 2 × Earnings Value) ÷ 3
This gives greater importance to profitability while still recognising the value of the company's assets.
The reasoning is that buyers are interested in both aspects: the assets provide a financial foundation, while the company's ability to generate earnings is often a major factor in the investment decision.
The practitioner's method is also associated with the valuation of unlisted company shares for Swiss tax purposes. However, a tax valuation does not necessarily represent the price a buyer would pay for the business.
For a company sale or succession, the method should therefore be assessed alongside the company's individual circumstances and market conditions.
2. Market-Based Valuation Using Multiples
Another approach is to estimate a company's value by comparing it with similar businesses.
This method uses financial multiples based on measures such as EBIT, EBITDA or revenue.
For example, a company might be valued using an EBIT multiple of three to six, depending on the industry, company characteristics and available market evidence.
The appropriate multiple varies considerably between businesses and should not be treated as a universal benchmark.
This approach is particularly useful when reliable data from comparable transactions is available, such as in certain areas of retail, trade and professional services.
Why Owner Dependency Matters for Small Businesses
One important factor in SME valuations is the company's dependence on its owner.
The smaller the business, the more its success may rely on the owner's personal relationships, expertise and day-to-day involvement.
For example, if most customer relationships depend directly on the owner, a buyer may face significant risks when that person leaves.
This is often referred to as owner dependency risk.
Depending on its severity, it may lead to a reduction in the company's estimated value.
It is a factor that many initial business valuations overlook.
Conclusion: How Should You Value Your Business?
Asset-based valuation provides a useful starting point because it shows the value of what your company owns.
However, when selling a business or planning succession, profitability and future earnings are often even more important.
Most buyers want to understand not only what a business owns today, but also how much income it can generate in the years ahead.
By combining asset value and earnings value through the practitioner's method and comparing the result with relevant industry multiples, you can establish a more realistic basis for valuation and negotiations.
Are you planning a business succession, considering selling your company or looking to start a business in Switzerland?
We support Swiss SMEs at every stage, from company formation to financial analysis and business valuation.
Disclaimer: This article is provided for general informational purposes only and does not constitute professional financial, tax or business advice. Every situation should be assessed individually, and we recommend seeking professional guidance for questions relating to your specific circumstances.
