Company valuation: Methods

In the simplified German capitalized earnings method as per Sections 199 ff. BewG (Tax Valuation Act), the determination of the tax basis for inheritance and gift tax purposes have priority. It is based on a past oriented valuation method, which is mandatory for unlisted corporations as well as for sole proprietorships, partnerships and independent professionals. In case it does not lead to an adequate value, the taxpayer must obtain a company valuation in order to prove a lower tax base to the tax authority when applicable.

The company valuation is determined with the multiplier method in a simple and cost-effective manner. The company value is calculated by multiplying values such as Sales, EBITDA, EBIT, Cash Flow or the annual net profit by a multiplier derived from benchmark companies. If it is a known fact that in the past within a specific business sector, on an average 6 times of EBIT has been paid for a company of a specific size category this is applied to the company being valued, in order to get an approximation of the company value. For calculating the value of shareholders, the financial liabilities must be deducted. This method is often used for the purpose of M&A deals or when the clients only want to get a general idea of the achievable range of a company’s value.

Valuation as per the valuation standard S 1 of the Institute of Chartered Accountants (IDW S1) is often done for expert opinions and is documented in an expert’s report. Such a report satisfies the highest standards of accuracy and can be used e.g. to prove a specific value to a court or to the tax authorities. As per IDW S1 the company value is generally obtained from the financial surpluses, made by the company under the going concern assumption and by sale of the assets not required for operations. The financial surpluses, freely available to the company owner or investors in the future are calculated after taxes arising at company and at shareholder level and are discounted to the valuation date. The two alternative methods are the capitalized earnings method and the Discounted Cash flow method that theoretically should lead to the same company value. In Germany, the capitalized earnings method is more common, whereas the Discounted Cash flow method is more popular in foreign countries.

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