IDW S1 method in german practice

The measure of things in german business valuation

Company valuations are often required in shareholder disputes, inheritance disputes and family law disputes in Germany. Such appraisals are either commissioned by the parties to build up negotiating positions or requested by german courts from an expert as an appraisal in civil proceedings.

The valuation according to the german IDW standard in accordance with the Principles for the Performance of Business Valuations IdF 2008 (IDW S1 expert opinion) is court-approved and recognized in german practice. The IDW S1 appraisal is a standardized valuation procedure that is developed and refined by the Institut der Wirtschaftsprüfer (Institute of Public Auditors in Germany). The current status is presented in the IDW standard IDW S1 in the 2008 version.

Practical advice: The IDW S1 expert opinion is intended to determine a so-called objectified value of the german company that can be verified and substantiated by third parties. In the valuation report, a clear company value or value range must be stated and justified in Germany.

The recipient of the expert opinion should be able to understand and evaluate the assumptions, basic considerations and conclusions from his point of view.

For a non-binding inquiry, please contact one of our contact persons directly by phone or e-mail or use the contact form at the bottom of this page.

Legal services around business valuation in Germany

Our certified specialists for german inheritance law, corporate law and tax law in commercial law firms will advise and represent you in all structuring and conflict matters relating to business valuations, in particular on the following topics:

• Company valuations according to IDW S1
• Indicative company valuation
• Second opinions on company value appraisals
• Company valuation for gift and inheritance tax purposes
• Company valuation for the calculation of compulsory portions
• Company valuation for divorce
• Company valuation in case of withdrawal from a company
• Company valuation for M&A, company sale

In addition, we are also happy to support you with company valuations in Germany independently of a legal mandate:

Valuation approaches of the IDW in german practice

The IDW recognizes two valuation approaches. One is the discounted cash flow method. Here, the german enterprise value is obtained by discounting the cash surpluses (so-called equity method).

The so-called capitalized earnings value method is considered to be equivalent and is probably predominantly used in german practice. In contrast to the equity method, the distribution of the commercial profit is used as the starting point. The enterprise value is determined on the basis of the expected future earnings of the company.

The content of an IDW S1 expert opinion ub german practice should essentially include the following:

• Presentation of the valuation task: client and reason for valuation
• Presentation of the valuation principles and methods applied
• Description of the valuation object: legal basis, economic basis, tax circumstances
• Presentation of the information on which the valuation is based: Analysis of the past, planning calculations against the background of the underlying assumptions, availability and quality of the initial data, plausibility assessment of the planning, delimitation of responsibility for assumed information
• Presentation of the valuation of the assets required for operations: derivation of the expected financial surpluses, surpluses in the detailed planning period, sustainable surpluses of the perpetual annuity, derivation of the capitalization interest rate, base interest rate, risk premium, growth discount, determination of the present value of the financial surpluses
• Presentation of the separate valuation of non-operating assets
• Enterprise value: if necessary, plausibility assessment of the valuation result
• Concluding statements

In the case of german small and medium-sized enterprises (SMEs), abbreviated reporting may be agreed.

How is a company valuation prepared in german practice?

The company value is basically derived from the profits to be expected in the future. For this purpose, a so-called planning calculation is prepared in Germany. In the planning calculation, earnings planning is carried out for a period of 3 to 5 years. This is regularly based on an analysis of past years combined with forecast assumptions. Careful earnings planning that is also comprehensible to outsiders is one of the focal points of any company valuation.

In the planning calculation, adjustments must be made to the accounts, for example, for non-market compensation with owners (employment contracts, leases, transactions), balance sheet policy measures (in particular strategy prior to company sales), one-off special influences that never or not regularly recur, e.g. restructuring costs or gains and losses from asset disposals.

The capitalization rate is another important determinant of the enterprise value in german practice. It determines the return that the investor can expect on his investment. The starting point is the return on a risk-free alternative investment, the so-called prime rate. A risk premium is added to this. In german practice, this is calculated on the basis of the so-called market risk premium and the so-called beta factor. The beta factor reflects the individual risk of the company being valued. If the individual risk is higher, the market risk premium increases; if it is lower, the premium is reduced accordingly.

Important factors in german company valuation

• Retention of the previous management
• No consideration of measures that are only possible but not specifically planned
• No consideration of synergy effects that depend on a specific acquirer
• Deduction of an appropriate imputed company wage - Transactions with related parties at arm's length price

Net asset value in german practice

The net asset value plays a role in the valuation only to the extent that the amount and timing of reinvestments can be derived from the condition of the net asset value for the planning calculation. Assets not required for business operations must be identified in a valuation and reported separately. The lower value of a valuation is the liquidation value. This is the value that would be achieved if the german company were liquidated.

Documents for the IDW S1 valuation in Germany

For a valuation in german practice, we require in particular the main company contracts, tax assessment notices, reports on external tax audits, pending legal proceedings, impending legal claims, disputes at shareholder level, annual financial statements, available interim financial statements or business analysis, documents on sales planning, financial planning and investment planning, list of customer receivables and suppliers and liabilities.

Indicative business valuation in german practice

The little "sister" of the IDW S1 enterprise valuation is the indicative enterprise valuation. In german practice, it is often the case that a well-founded and comprehensible value assessment is required, but the IDW S1 procedure with its high formal requirements is actually too time-consuming and therefore too expensive. This is where indicative valuation comes in handy. More about this here: Indicative valuation (following soon)