Company valuation, share valuation Germany
Valuation methods, expert opinions, costs, etc. in german practice
The valuation of companies in Germany can be done in different ways. Basically, it must first be differentiated according to the legal form of the company and the business sector in which the company is active. In addition, there are a number of other aspects that are relevant for the valuation (in particular, the reason for the valuation also plays a role; i.e., it is a question of anticipated inheritance, gifts or disputes between shareholders, for example).
In addition, there are various valuation methods, some of which lead to different results in german practice. We present the most important aspects below.
Evaluation from our expert!
In our team, tax advisor Martin Stürmer takes care of the company valuation. As a specialized expert, he works together with our lawyers from the various german legal fields. You can also engage him independently of a legal mandate.
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The 5 questions to ask when valuing a company or company shares in Germany
- What is the reason for the valuation?
- What type of company is to be valued?
- What is the appropriate valuation method?
- Who can carry out the valuation?
- What does the company valuation cost?
The reason for the company valuation under german law
As a rule, the reason for valuing a company is not mere curiosity, but a planned transaction or a legal dispute. Some valuations are only for orientation purposes, others have to stand up in court. In german consulting practice, the following situations dominate:
- Corporate transaction, M&A: When buying or selling a company in Germany, a share in a company or a business, the determination of the company's value serves to determine the price for both parties. The parties are free to decide whether to arrange for a third-party valuation in advance of the transaction. A company valuation is also mandatory in the case of mergers or demergers under the German Reorganization Act (Umwandlungsgesetz), when control and profit transfer agreements are concluded, and often also in the case of capital increases. Read more: Company value & company acquisition
- Compensation of departing shareholders: If a shareholder leaves a GmbH or partnership in Germayn due to termination, exclusion or redemption, he is generally entitled to a statutory or contractual compensation claim. The same also applies to squeeze-out procedures under german stock corporation law. If the articles of association specify the enterprise value or the valuation method, it must be examined whether the compensation clause is legally valid. More: Enterprise value & shareholder compensation under german law (following soon)
- Calculation of compulsory portion claims: If relatives entitled to a compulsory portion are disinherited and business assets are part of the estate, the enterprise value must be determined for calculating the compulsory portion claim. And a valuation is also expedient when structuring the company succession, for example by waiving the compulsory portion. Read more: Enterprise value & compulsory portion Germany (following soon)
- Calculation of equalization of gains: If one spouse's assets include a company, in Germany, a company valuation must be carried out in the event of divorce to determine any equalization of gains claims. Read more: Business value & gain Germany (following soon)
- Determining the tax value for inheritance and gift tax: If a company or a share in it is inherited or given away, the tax value of the business must be determined for calculating inheritance tax or gift tax. More about company value inheritance tax & gift tax
The legal form of the company under german law
When valuing a company or shareholding, some points are already set on the basis of the legal form of the company. Different valuation criteria apply to a medium-sized production company in the form of a GmbH (limited liability company) than to a freelance practice, a sole proprietorship or an asset-managing real estate company in Germany. Incidentally, the only unproblematic legal form for business valuation is the listed stock corporation. Its market value is continuously determined on the financial markets.
The valuation method in german legal practice
For each occasion and each type of company, the appropriate valuation method must first be determined. Company valuations to be carried out thus depend on the respective objective.
On the one hand, there is the capitalized earnings value method or the discounted cash flow method originating from business administration. On the other hand, there are comparative value methods and special industry methods, such as those of the German Medical Association.
Finally, for the purposes of the German Inheritance and Gift Tax Act (Erbschaft- und Schenkungssteuergesetz), 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 (BewG), which, however, does not generally lead to objectified values.
Some valuation approaches, such as the book value or the Stuttgart method, are now considered unsuitable for determining the actual enterprise value. Nevertheless, they still appear in particular in articles of association.
Click on the heading to find out more about the individual methods:
Classical capitalized earnings method IDW S1 in german practice
In theory and practice, the valuation principles for business valuations have been established in accordance with pronouncements of the Institute of Public Auditors in Germany (IDW), in particular in IDW S 1. Here, 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 which represents the return on an alternative investment adequate to the investment in the company being valued. Future expenses and income are therefore taken into account and discounted using the perpetuity model.
Further information on the method can be found here: German income capitalization approach according to IDW S1 (following soon)
Discounted Cashflow (DCF method)
The DCF method is not based on earnings, but rather on actual cash inflows and outflows. The discounted earnings method and the discounted cash flow method lead to identical company values based on the same planning assumptions.
Further information can be found here: DCF method (following soon)
Simplified capitalized earnings method
The simplified capitalized earnings value method refers to historical values of the annual results of a company in Germany. The adjusted, average annual results of the last 3 years are multiplied by a flat-rate factor and this results in the enterprise value.
The particular advantage of this method is that it is easy to apply in german practice, although the application of the legally defined factor generally leads to very high values which do not correspond to a market value of the german company.
Further information on this topic can be found here: Simplified capitalized earnings value method (following soon)
Valuation of medical practices in Germany
For german medical practices, for example, the German Medical Association has published its own valuation method. This is based on an annual profit, which must first be adjusted for certain expenses and income and increased by a so-called multiplier. Alternatively, there are so-called multiplier procedures.
A company value is calculated by multiplying sales or annual profit by a factor. Due to the fact that individual company aspects are not taken into account, these methods are not suitable in german practice.
EBIT and sales multiples method
So-called EBIT multiples, which show the earnings multiplier depending on the industry and size of the company, are a common means of approximate calculation. Banks and advisors regularly refer to such multiples when considering a sale in Germany. However, most tables have a shortcoming: the EBIT factors shown there refer to listed companies, which have little to do with the market price environment of the segment of SMEs (small and medium-sized enterprises), the most important in Germany in terms of numbers, in the value range between 1 and 10 million EUR and tend to be significantly higher than for SMEs.
Substance value method
As the name suggests, when using the net asset value method, the value of a german company is derived on the basis of the "substance", i.e. the assets of the company. This means that all machinery, office equipment, inventory with raw materials and supplies, receivables from customers and other assets such as sales tax receivables or similar, as well as real estate owned by the company are valued individually and added up to determine the value of the company.
Once the value of the assets (fixed assets and current assets) has been determined in german practice, all existing liabilities (trade payables, tax and personnel liabilities, but also bank loans or pension obligations, etc.) are deducted from the value of the assets. The residual figure determines the value of the company's equity.
Stuttgart procedure
As a mixed method, the Stuttgart method takes into account both the operating assets (net asset value) and the earnings (capitalized earnings value). The Stuttgart method is one of the so-called excess profit methods in german practice. Here, an excess profit limited to 5 years is added to the net asset value, whereby the interest rate for the excess profit interest is 9 percent.
In addition to this basic principle, the Stuttgart procedure has numerous special regulations as well as surcharges and deductions for certain circumstances or types of companies in Germany.
Further information can be found here: Stuttgart Procedure (following soon)
Company valuation for german startups
For startups and companies in growth, some special features apply when valuing the company in Germany. This not only applies when looking for investors or in the next round of financing, but can also become relevant for employee stock option programs and virtual shares already for employees of startups. You can find more information on this here (following soon).
In principle, a distinction must be made between overall valuation methods (the german company to be valued is understood as a valuation unit) and individual valuation methods such as the net asset value method (which is based on the market value of all tangible and intangible individual assets less liabilities). Mixed methods are also used in german business and share valuations.
In german practice, especially in the case of smaller units, rough calculations (market price-oriented methods) are often used.
Indicative enterprise valuation in Germany
Depending on the requirements in the specific question, we can carry out an initial indicative valuation.
The indicative company valuation is usually carried out on the basis of the capitalized earnings value method. In this process, a forecast of future earnings is made on the basis of past values. Taking into account current interest rates and on the basis of standard market risk factors, initial valuations can be determined. Particularly in the case of inheritances and donations, a comparison is generally made with the simplified capitalized earnings value method in order to be able to estimate whether it makes sense to prepare an expert opinion in accordance with IDW S 1 in order to justify a lower company value to the tax authorities.
However, it must be taken into account that such an indicative valuation cannot fully meet the requirements of an expert opinion according to IDW S 1. If desired or necessary, we can also prepare such expert opinions.
The expert company valuer in Germany
In german practice, various players deal with the valuation of companies and company shares. Auditors, tax advisors or tax lawyers are just as active here as management consultancies or banks. Especially if the reason for the valuation is a legal dispute or the valuation is to be submitted to the tax office, a qualified, experienced expert is naturally required. As a rule, however, this expert does not have to be publicly appointed or sworn in. What is important is his experience and expertise in german business valuations.
In addition to business management know-how, the company valuer must also be familiar with the highest court rulings on legal issues relevant to valuation in Germany. Company valuation is therefore an interface between business administration and jurisprudence.
The costs of business valuation in german practice
There is no fixed price for a company valuation in Germany, any more than there is for the company itself. In contrast to real estate valuation, for example, no tables have been established in german practice for the valuation of sole proprietorships, limited liability companies or partnerships, according to which the costs for the company valuation are calculated on the basis of the value determined.
Instead, it is customary for the client of the valuation to agree on a fee with the expert on the basis of the time spent. The hourly rates depend on the qualifications and experience of the expert as well as the complexity and importance of the valuation itself.
In individual cases, it will also be possible to agree on a flat rate.