The valuation of small and medium-sized enterprises

Fabio Giulio Grandis, Federica Palazzi


The aim of this work is to verify which valuation methods are used by accountants to define the value of Italian Small and Medium-sized Enterprises, considering the event of a change in the decision-making owner. Moreover, the objective is also to examine if the valuation methods employed in practice coincide with those methods considered theoretically correct and suggested by international bodies like the Federation of European Accountants. An adequate valuation should strongly increase the probability of achieving development corporate processes, through business transfers or rearrangement of ownership structure with the entrance of new partners or the start of entrepreneurial successions.

The findings of this work are based on the analysis of 70 cases concerning Italian SMEs (according to the definition of European Commission), which span the period from 1978 to 2012. Specifically, we have analyzed the valuation reports, elaborated by professionals. The empirical data clearly shows us that the preferred method to valuate Italian SMEs is the mixed method, particularly the Anglo-Saxon method (with limited capitalization of goodwill). SMEs are shaped by their entrepreneurs that strongly affect the future perspectives of profit. Therefore, in the case of changes in the decision-making owner, perspectives of profit will significantly change, as they especially depend on the entrepreneur. Thus, it is reasonable to suppose that goodwill has a limited duration, in case of changes in ownership arrangement. However it is also important to consider the assets consistency of a business, because such a consistency guarantees the prosecution of business activity, also to the different decision-making owner. When an expert has to define the value of a SME, he cannot abstract from specific peculiarities of this type of firm that inevitably condition the choice of valuation method: the entrepreneur is the owner and decision-maker of the firm; SMEs do not have adequate planning and control systems, therefore it is very difficult to make trustworthy previsions.  

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