The asset-based approach – Valuing what the company owns
The Adjusted Net Asset Value (ANAV) method
The asset-based approach values a company based on its assets: first, the book net asset value (assets minus liabilities) is calculated, then adjusted to reflect market value. This method corrects accounting distortions: a building purchased for €500,000 twenty years ago and depreciated to €250,000 on the books may be worth €1,200,000 at current market prices. Revaluations typically concern tangible fixed assets (land, buildings, machinery), inventories (removal of obsolete stock) and receivables (deduction of irrecoverable amounts).
The ANAV method is particularly well suited to asset-holding companies (real estate holding companies, property companies) or industrial businesses with significant tangible assets. Its main limitation is that it completely ignores the company’s future earning capacity and does not value intangible assets such as brand, know-how or a loyal customer base.
Case study: Jacques and his real estate company
Jacques, 62, plans to sell his SARL property management company holding six commercial buildings in Luxembourg City. His accountant calculates a book net asset value of €2.1 million. However, after an independent property valuation, the buildings are worth €4.8 million (vs €2.5 million on the balance sheet), resulting in an ANAV of €4.4 million. Without this revaluation, Jacques would have undervalued his company by more than €2 million. In this case, ANAV is the most relevant method, as the value lies in the real estate assets rather than in the management activity itself.
Income-based methods – Valuing earning capacity
Valuation multiples (comparative approach)
The multiples method values a company by applying a multiplier to a financial metric (revenue, EBITDA, net profit). For example, professional services SMEs in Luxembourg are generally sold for between 0.8x and 1.2x annual revenue, while IT companies may reach 4x to 6x EBITDA. Multiples are derived from analysing recent comparable transactions in the same sector and geographic area.
Advantages: simple, fast and reflective of real market prices. Drawbacks: finding truly comparable transactions is difficult for unlisted Luxembourg SMEs, and multiples vary widely depending on size, profitability and growth prospects.
The DCF (Discounted Cash Flow) method
The DCF method values a company based on the discounted sum of its projected future cash flows. Methodology: forecast free cash flows over five years, determine a terminal value (year six onward), and discount these flows at the required rate of return (WACC, generally between 8% and 12% for a Luxembourg SME depending on sector risk). This method incorporates growth prospects and future strategy, but relies entirely on the quality of the forecasts.
DCF is particularly suitable for high-growth or transforming businesses where the past is not representative of the future. It is the preferred method of private equity investors for valuing start-ups and scale-ups.
Case study: Marie and her IT company
Marie, founder of a cybersecurity company (revenue €3.5 million, EBITDA €800,000), is negotiating with an investment fund. Using multiples would result in €800,000 × 5 = €4 million (standard sector EBITDA multiple). However, Marie demonstrates through a robust business plan that she will double EBITDA within three years thanks to signed contracts. The DCF model, projecting these future cash flows, results in a valuation of €6.2 million. The investor validates the assumptions and agrees on €5.8 million, a 45% increase compared to the multiples approach. Without a DCF, Marie would have left €1.8 million on the table.
Which method should you choose for your situation?
Adapting the method to the valuation context
The choice of method depends on three factors: the nature of your business, the purpose of the valuation and the information available. For family succession, an adjusted ANAV is often preferred, as it reflects tangible assets and limits tax disputes. For a sale to a competitor or industrial buyer, combine sector multiples with a DCF if synergies are expected. For a capital raise, investors will require a DCF based on your forward-looking business plan.
Professional practice recommends applying several methods and either using a weighted average or defining a valuation range rather than a single figure. Consistency between methods reassures buyers; significant discrepancies highlight areas requiring further analysis.
Case study: Paul hesitates between two methods
Paul, 58, is selling his accounting firm (revenue €2.2 million, net profit €380,000). Book net assets amount to only €150,000 (few tangible assets). Sector multiple: 0.8x to 1x revenue = €1.76 million to €2.2 million. Capitalisation of earnings (net profit / 10%) = €380,000 / 10% = €3.8 million. A huge gap. Explanation: ANAV is inappropriate (no assets), the revenue multiple undervalues exceptional profitability, while earnings capitalisation overstates value as it ignores client retention risk. The chosen solution: a valuation of €2.8 million, being the average between the upper revenue multiple (€2.2 million) and a risk-discounted earnings capitalisation (€3.4 million). Both parties accept this balanced approach.
Conclusion
Correctly valuing your Luxembourg SME requires a combination of financial expertise, in-depth sector knowledge and a realistic assessment of future prospects. The three main methods – ANAV for assets, multiples for market benchmarking and DCF for growth – complement each other rather than compete.
At PCG, we support Luxembourg business owners in valuing their companies for succession, sale or fundraising. Our proven methodology combines all three approaches, integrates Luxembourg tax specifics (notably for family transfers) and delivers a valuation report that can be robustly defended before buyers, investors or tax authorities. Contact us for a professional valuation of your SME.
