Indicative company valuation in Germany

Cost-effective assessment of the company value in german practice

The absolute, correct company value can only exist in theory. A company value in Germany depends on many factors.

In many situations, pragmatic, cost-appropriate solutions for business valuation are needed in german practice. These include:

• Valuation of companies for the compensation of departing shareholders
• Settlement of communities of heirs with companies
• Calculation of company value for compulsory portion claims
• Anticipated succession for entrepreneurs with compensation payments
• Company valuation in connection with divorce (equalization of gains)
• Valuation in case of purchase and sale of companies
• Granting of and calculation of the tax rate for employee shareholdings

Classical valuation methods in Germany are either very complex and therefore costly, or very inaccurate. Here the indicative company valuation can be a possibility to find a solution between the parties involved on the basis of a comprehensible company value (indicative).

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Fundamentals of business valuation in Germany

There are various valuation methods for valuing companies, some of which lead to different results.

Basically, it is necessary to differentiate between the legal form of the german company and the business sector in which it is operating. In addition, there are a number of other aspects which are relevant for the valuation in german practice (e.g. personal or professional dependencies on the owner, economically close relationships with individual customers and/or suppliers, etc.).

On the one hand, there is the capitalized earnings value method or the discounted cash flow method originating from business administration in Germany. On the other hand, there are comparative value methods and special industry methods, such as those of the German Medical Association. Finally, for tax purposes, the legislator has introduced a uniformly applicable capitalized earnings value method in accordance with the provisions of Sections 199 et seq. of the German Valuation Act. However, as a rule, this does not lead to objectified values in german practice. Simplified valuation methods, the so-called sales or profit multiples, which multiply sales and earnings figures by size and industry-dependent factors, are also widespread in german practice.

Classical capitalized earnings method in german practice

In theory and practice, the valuation principles for business valuations have been established in accordance with the pronouncements of the Institute of Public Auditors in Germany (IDW), in particular in IDW S 1 (IDW Standard: Principles for the Performance of Business Valuations, as of April 2, 2008).

In this context, the value of a german company is determined exclusively by financial targets in the form of the present value of the future net inflows to the company owners associated with ownership of the company. To derive the present value of the net cash inflows, a capitalization rate is used that represents the return on an alternative investment that is adequate to the investment in the company being valued in Germany. Future expenses and income are therefore taken into account and discounted in accordance with the perpetuity model.

In simple terms, the company valuation is based on the return that the investor expects on his investment, taking into account the risk. The preparation of a fully-fledged IDW S1 business appraisal is very costly and time-consuming in german practice.

More about the IDW S1 procedure can be found here: IDW S1 Procedure

Indicative company valuation Germany

An indicative company valuation is an initial value assessment that is carried out on the basis of the capitalized earnings value method in german practice. The advantage of an indicative company valuation is that it is considerably less expensive than a full company valuation in Germany.

In this case, not all formal regulations of the professional pronouncements of the IDW S 1 (principles for the implementation of business valuations) are fully taken into account, so that a simplified first value assessment for the company can be given in order to be able to make further considerations and decisions on the basis of this.

However, the calculation model and the calculations to be carried out are already based on the professional pronouncements, so that in the event of any changes in the framework conditions, corresponding variants can be calculated quickly and easily. German practice has shown that as a rule a few factors have a significant influence on a company's value and that it is therefore helpful and expedient to be able to map variants in the further process.

The tax and / or legal consequences resulting from the determined company value are discussed in cooperation with the legal advisors - either colleagues working in our company or also external advisors - so that the company value determination is not to be seen as a "stand alone" but has to be considered in interaction in german practice.

The indicative company valuation is also a suitable tool for preparing for upcoming negotiations in Germany, e.g. in the case of shareholder disputes, or for preparing for a sales process, in order to obtain an initial in-depth assessment of the potential company value.

Simplified capitalized earnings method in german practice

The simplified capitalized earnings method refers to historical values of the annual results of a german company. The average annual results of the last 3 years are multiplied by a lump-sum factor and this results in the company value. The particular advantage of this method is that it is easy to apply in german practice.

This valuation method is very approximate and does not usually lead to reliable, usable company values.

You can find out more about the simplified capitalized earnings value method here: Simplified capitalized earnings value method

The multiplier method in Germany

Alternatively, there is also the so-called multiplier method. A company value results from a lump sum multiplication of sales or annual result by a factor. Due to the fact that individual company aspects are not taken into account, these methods are not suitable in german practice.

However, it can be used to check the plausibility of the result of the company valuation.