Business Valuation: DCF, Multiple & Earnings Value Compared

You have a business with €200,000 EBITDA, €300,000 cash flow, and stable earnings. How much is it worth?

Answer one from a consultant: "At 6x multiple: €1,200,000."

Answer two from another consultant: "Using earnings value method: €1,666,667."

Answer three from an investor: "With DCF model (10% discount rate): €3,000,000."

Three different answers! Which is right? The answer is: all three are right – and all are wrong. It depends what assumptions you make.

This article explains the 3 methods, their differences, and how to combine them to find a fair price.

EBITDA × Multiple = Company value

Example: €200,000 EBITDA × 6 multiple = €1,200,000.

Advantages:

• Quick to calculate (5 minutes).

• Industry-comparable (you can say "the market trades at 6x").

• Easy to understand (even for non-finance people).

Disadvantages:

• Ignores future growth (or decline).

• Ignores capital intensity (high-capex businesses overvalued).

• Ignores financing structure.

When this method fits: for quick orientations, for competitor comparisons, for industries with stable multiples.

Formula: Company value = (Sustainable earnings / capitalization rate)

Example: €200,000 sustainable earnings / 0.12 (12% capitalization rate) = €1,666,667.

Advantages:

• Theoretically sound and academically correct.

• Accounts for risk (higher cap-rate = higher risk).

• "German standard model" – recognized in banks and consulting.

Disadvantages:

• Hard to calculate (what's "sustainable earnings"? average of last 3? 5 years?).

• Capitalization rate is hard to determine (12%? 15%? Why?).

• Not internationally standardized.

When this method fits: for established businesses with stable earnings, for M&A in German-speaking countries, for academic correctness.

DCF is more complex: it forecasts future cash flows (year 1, 2, 3, ..., 10) and discounts them to today with a "discount rate" (e.g., 10%).

Formula (simplified): Company value = Σ (future cash flow / (1 + discount rate)^year)

Example: a business with €300,000 cash flow today, expecting 5% annual growth, 10% discount rate:

• Year 1: €315,000 / (1.10) = €286,364

• Year 2: €330,750 / (1.10)^2 = €273,223

• ...

• Year 10: €488,000 / (1.10)^10 = €188,300

• Terminal value (from year 11): Perpetuity = €488,000 / 0.05 = €9,760,000 discounted = €3,700,000

• Total: ~€3,500,000

Advantages:

• Accounts for growth and future scenarios.

• Very flexible (you can run different scenarios).

• Investor language (private equity loves DCF).

Disadvantages:

• Very complex (many assumptions, small changes = big differences).

• "Garbage in, garbage out" – wrong assumptions = wrong valuation.

• Very sensitive to discount rate (10% vs 12% discount rate = 2x difference).

When this method fits: for growing businesses, for PE/VC deals, for strategic acquisitions, when you need scenario analysis.

In practice, professional advisors use all 3 methods combined:

1. EBITDA multiple as "sanity check": is the price in the industry range? (e.g., €1.2M)

2. Earnings value as "anchor": this is the solid base valuation. (e.g., €1.7M)

3. DCF as "optimist scenario": if the business grows, it can be worth more. (e.g., €2.5M with high growth)

Result: a "valuation corridor," e.g., €1.4–1.8M is fair. Anything below is a bargain, anything above is optimistic pricing.

With a strong VOS Score, all 3 valuation methods improve:

EBITDA multiple: with good transaction readiness the multiple goes from 6x to 7x or 7.5x.

Earnings value: with stable documentation and clear processes, "sustainable earnings" is rated higher, capitalization rate drops (from 12% to 10% because risk drops).

DCF: with better data and stable management team, growth forecast is more conservative yet realistic (instead of "+20% hope," more like "+5% reality," but with high confidence).

That's the "VOS effect": all 3 methods give you higher valuations because uncertainty drops.