Company valuation

Valuations on purchase, sale, change in shareholders, reorganisation and succession.

A valuation can be triggered in many ways: a shareholder leaves, a buyer comes forward, a succession is due, a dispute arises between shareholders or a financing round is coming up. A company valuation is not always linked to a transaction.

The method to be applied depends on the purpose of the valuation. It is not about a number, but about how robust and objectively comprehensible that number is. We value, for example, in accordance with IDW S 1 “Principles for the Performance of Business Valuations”, supplemented where appropriate by multiples methods as a plausibility check, to the extent that the purpose really requires.

With the expertise of our team of advisers, we provide you not only with a professional analysis but also with valuations performed in connection with the accounting or sale of individual assets.

The difference from a valuation boutique lies afterwards: tax advice and company law are under the same roof, the valuation ends with the completed transaction, our advice begins beforehand and continues after the transaction has been completed.

What we do for you

Are you facing the challenge of finding the value for your company? We assist you in your specific valuation projects. Whether you are a buyer or a seller of a company, we advise and assist you in determining the value prior to transactions and support you in the negotiations. In addition to determining the purchase price of companies and parts of companies, we are happy to advise you on other valuation purposes:

• Valuation of companies and company shares on purchase and sale, with support in the negotiations
• Valuations on a change in shareholders and on the exit of a shareholder
• Valuation for inheritance and gift tax purposes
• Valuation on a reorganisation
• Preparation of purchase price allocations
• Impairment assessment of contributions in kind
• Determination of arbitration values
• Drafting of fairness opinions in accordance with IDW S 8
• Valuation of individual tangible and intangible assets
• Valuation of equity investments for accounting under HGB and IFRS

Principles for company valuations in accordance with IDW S 1

What determines the value of a company?

Companies consist of tangible and intangible assets. Financial surpluses are generated through their interaction. The value of a company is therefore not determined by the values of the individual components of assets and liabilities, but by the interaction of all values.

The value relates on the one hand to operating assets and on the other hand – if there are any – to non-operating assets, which are to be valued separately.

Which standard do we apply?

Company valuations are to be performed using the capitalised earnings method or the discounted cash flow method. We apply the standard of the Institute of Public Auditors in Germany (IDW) that is customary in professional practice and recognised in the literature and case law: IDW S 1 “Principles for the Performance of Business Valuations”.

Alternatively, there are several simplified valuation methods that can often provide an indication of the value of the company at a considerably lower cost. Here we can offer appropriate alternatives according to your wishes.

Which surpluses are included in the valuation?

When determining the value of a company, the decisive factor is the income that will accrue over time to the entrepreneur in the future.

The net income of the company owners to be discounted for determining the value of a company results primarily from the owners' entitlement to distributions or withdrawals of the financial surpluses generated by the company less the contributions to be made by the owners. Contractual or financial restrictions on distributions or withdrawals must be taken into account. Furthermore, other personal taxes of the company owner linked to the ownership of the company must be considered.

The net income of the company owner depends primarily on the company's ability to generate financial surpluses. A company valuation therefore requires a forecast of the company's future financial surpluses. The basis of valuation is only those financial surpluses of the company that become available to the owners as net income (inflow principle).

Special features may arise in the valuation of companies with low earnings. A company can be described as having low earnings if its return on capital is sustainably lower than the capitalisation rate.

Why does the accounting principle of prudence not apply here?

In the capacity of a neutral expert, the certified public accountant is required to be impartial. The principle of prudence, which is binding in accounting under commercial law, reflects an unequal weighting of the sometimes conflicting interests of creditors (capital preservation through distribution lock-ups) and company owners (distribution of profits generated) in favour of creditor protection and must therefore not be taken into account.

Uncertain future developments may not be included in the calculated value of the company in a way that unilaterally disadvantages one of the parties involved – in the case of a “prudent estimate” of the future financial surpluses, that would be the seller or the shareholders to be paid out. However, the irrelevance of the (accounting) principle of prudence does not mean that the investor is to be assumed to be risk neutral.

Company values determined in expert opinions are regularly based on a large number of assumptions that may have a considerable influence on the valuation result.

How is the value of a company determined?

The value of a company (present value of future earnings) is determined by discounting the future financial surpluses to the valuation date. If the company to be valued has an indefinite life, its value corresponds to the present value of the future financial surpluses from the operating assets plus the non-operating assets.

How is risk taken into account?

Future financial surpluses cannot be forecast with certainty due to uncertainty about the future. A business commitment always entails risks and opportunities. Market participants are compensated for assuming this business uncertainty (business risk) by risk premiums; theory and practice agree that economic entities give greater weight to future risks than to future opportunities (risk aversion).

Taking this attitude to risk into account, the uncertainty of future financial surpluses can in principle be included in the valuation either as a deduction from the expected value of the financial surpluses (certainty equivalent method, earnings discount method) or as a premium on the capitalisation rate (interest premium method, risk premium method). The interest premium method, which is generally applied in Germany and internationally, has the advantage that it can be based on empirically observable behaviour. It thus allows a market-oriented approach to the assessment of risk premiums. Because a clear distinction is difficult to draw, no distinction is made between company-specific and general risks.

Capitalised earnings method or discounted cash flow method?

The IDW S 1 expert pronouncement on the principles for the performance of business valuations proposes applying either the capitalised earnings method or the discounted cash flow method. The discounted cash flow method is therefore one way of valuing in accordance with IDW S 1, but it is not the same as IDW S 1. The decision is often made in favour of the capitalised earnings method, which calculates the value of a company by discounting the financial surpluses accruing to the company owners in the future. These are derived from future earnings under commercial law, taking into account an expected dividend or profit retention policy. The value of the company is calculated and derived as part of an expert opinion.

When is a simplified valuation sufficient?

Simplified valuation methods include industry-standard indicator methods or multiples methods. Although these methods in no way offer the certainty of a company valuation performed to professional standards, they are often considerably easier to use and nevertheless frequently provide at least an indication of value. In a simplified company valuation, the scope of the mandate can be precisely specified in consultation with the client.

Intangible assets

Is it not the entire company to be valued, but a separate asset? We provide appropriate valuation solutions for both tangible and intangible assets.

We can professionally offer you the valuation of intangible assets in accordance with IDW S 5 “Principles for the Valuation of Intangible Assets” in our capacity as an independent expert, as an adviser or as an arbitrator. In particular, trade marks, rights, licences, customer base and patents are regarded as intangible assets.

In what capacity do we act?

As an independent expert, we determine a typified value for you from the perspective of an independent third party using a transparent methodology. If we deviate in some respects from the typified view, we act as an adviser to you. When there is a conflict, we can provide you with a settlement value as an arbitrator, which adequately takes into account the subjective views of the parties concerned.

What concepts of value are there?

From a business perspective, the value of an asset is determined on the basis of the expected future financial benefit that an acquirer can derive from the asset. The value is assessed differently from different perspectives.

The decision value reflects the subjective expectations regarding the future benefit to be derived from the asset. All options for action of the decision-maker are to be taken into account, regardless of the degree to which they have been substantiated. In terms of marginal pricing, this results in a lower price limit from the seller's perspective and an upper price limit from the buyer's perspective, up to which it would be advantageous for the buyer to acquire an asset.

The liquidation value when a company goes out of business is calculated as the sum of the assets recognised at their selling prices less liabilities and settlement costs, taking into account the best possible realistic liquidation strategy in each individual case. The conditions of the sales market for the assets to be liquidated are decisive. Any selling costs incurred are to be deducted from the sale proceeds.

The price is the result of a specific market transaction. The market price is the price that balances a multitude of offers and demands of market participants. The market price may thus differ from a typified or individually determined value.

Which valuation approaches can be used?

In principle, three valuation approaches can be used for the valuation of intangible assets: the market approach, the income approach and the cost approach. Several valuation methods are available within each of these approaches.

If, for a specific valuation purpose, a market price is primarily to be used to value an asset under the market approach, this can generally only be done if the observed market prices relate to sufficiently comparable assets. There must also be an active market.

The income approach assumes that the value of an intangible asset is derived from its ability to generate future economic benefits in the form of cash flows.

The cost approach includes the reproduction cost method and the replacement cost method. When applying the cost approach, costs can be based on what is required to produce an exact duplicate of the asset (reproduction cost method). Alternatively, it is possible to use the cost of producing or acquiring an asset that provides equivalent benefits (replacement cost method).

The decision as to which value concept and which valuation approach to use for the valuation of your intangible asset therefore depends on your valuation purpose. Please do not hesitate to contact us. We will find the right concept for you!

Arbitration and court opinions

Do you need a neutral third party to assist you in determining a value? We are happy to assist you with the valuation as an arbitrator or court expert if a neutral valuation based on typified principles is required. Tangible and intangible assets as well as company valuations pose no problem for us.