A company valuation may be required for various reasons. For example, the sale of a company or the inclusion of an investor may be pending. Furthermore, one can intend a participation of employees or family members, which also entails a company valuation. In addition, a company valuation is required for an inheritance or gift in order to determine the corresponding inheritance tax or gift tax. A very similar reason for a company valuation can also be a divorce. And you may soon apply a company valuation again to calculate a wealth tax. As different as the reasons for a company valuation may be, so diverse are the tax regulations and alternative methods. In addition to the simplified income value method enshrined in tax law, the IDW S1 method and various multiplier methods are also possible. However, in order to determine a minimum value for a company, another procedure is necessary, namely the substance value procedure.

Company Valuation: Simplified Income Value Procedure vs. IDW S1 Report

1st Company Valuation – Introduction

The company valuation is a process for determining the value of a company. What condenses so simplistic in a self-evident sentence to the quintessence of the meaning of the word company valuation is, however, much more complex. Yes, it is so space-consuming that it goes beyond the scope of this contribution. Therefore, we simplify the whole thing and focus on a few key points when examining the sense and practical application of company valuation. If you would also like to know more about company valuation, please refer to the accompanying special articles on the most important company valuation procedures. But even these represent only one part of a much more complex, even scientifically further investigated fact.

2nd tax base for business valuation

Corporate valuation is particularly important for tax purposes. Because even when collecting certain taxes, the value of a company is in the foreground. So the legislator has recognized the need to issue legal requirements for company valuation. Otherwise, you could always state the value of a company as it seems most appropriate to a taxpayer. Therefore, with the Valuation Act in German tax law, there is an independent law, which has, among other things, the valuation of companies. The Valuation Act is thus the central tax law provision for the valuation of assets in general. Consequently, if necessary, other tax laws also access the provisions of the Valuation Act. The same applies to company valuation. However, the provisions of the Valuation Act apply only if the individual tax laws do not contain any separate regulations.

A company valuation can be made from many and very different occasions. Here we only give a general overview. However, we think that this overview already makes it clear when a company valuation may or may not be necessary.

3.1. Acquisition or sale of a company

When it comes to a value for an object in general, this has always been connected with an exchange, that is, with trade. So it goes without saying that we call the company valuation in the context of a company purchase or sale first. But even the practical consideration of whether such a transaction should take place as a share deal or as an asset deal reveals that you can apply different criteria. Since the share deal is tax-beneficial for the seller, but the asset deal is tax-beneficial for the buyer, the company valuation of each of these two parties may also be different. For example, the seller is also likely to consider intangible goodwill when evaluating his company, while the seller tends to value each asset separately in the asset deal.

A certain special case here is the exit tax, which is incurred when permanently leaving shareholders in a capital company based in Germany. Even if there is no actual sale, the legislator fabricates a sale in such a case and examines whether a tax on the fictitious sale is incurred by the shareholder. And also for this, a company valuation at the time of the move is used in order to be able to determine indirectly the tax, which is otherwise derived from the actual profit on a sale.

3.2. Inheritance and donation as an occasion for company valuation

Although there is no exchange in the case of inheritance or donation of companies or shares, this still constitutes a transfer of assets. From a fiscal point of view, this is a circumstance that leads to a taxation of the transferred assets. Thus, the inheritance tax and gift tax is also the focus of our considerations. Because if such a transaction is associated with a tax, then you also have to determine with which valuation you have to measure the tax. Therefore, the Inheritance Tax and Gift Tax Act provides for a company valuation based on the Valuation Act (§ 12 ErbStG).

Another aspect in this context is the granting or reservation of a usufruct in donations. Here, too, a tax investigation by means of company valuation is envisaged, with which the net present value of the usufruct is determined.

Incidentally, a transfer of companies or shares in the framework of the establishment of a foundation is also an occasion to carry out a company valuation.

3.3. Corporate taxation in the event of divorce

If a marriage ends through divorce, this may lead to a financial dispute between the former spouses. If a company is also included, then of course the value of the company is also relevant here. So even in such a case, a company valuation is necessary in order to be able to include the actual value of the company in the discussion.

3.4 Admission of investors, employees & family members into the company

The company valuation may also be appropriate when taking in new co-entrepreneurs or shareholders, such as investors, deserving employees or family members. After all, one would also like to know with which share of the value of the company one makes this integration with the respective participants.

3.5. borrowing

Another item in our list is the company valuation as part of the negotiations to take out a loan for a company. Because a potential lender usually wants to know how solid the company is financially and economically. In particular, however, one would also like to assess in advance the value with which the company can stand as collateral in the event of a credit default. So the company valuation serves here the risk assessment in lending. Of course, the views on which method to use for company valuation can also differ.

3.6. collection of property tax

Although the last historical collection of wealth tax in Germany took place for the assessment period 1996, the wealth tax plays an important role in the 2021 federal election campaign. Therefore, one must currently also expect that a future government will revive the wealth tax. This is why we include property tax in our list of examples of a company valuation, because in the past, the taxation of company shares and assets was done by means of company valuation.

The following listing also includes only the most important methods by which a company valuation can be carried out.

4.1. The simplified income value method

The simplified income valuation method is the standard corporate valuation method for tax issues. It looks at the profits of the three years preceding the valuation date and applies a statutory multiplier to estimate the value of the company.

4.2. The procedure according to IDW S1

The so-called IDW S1 method is a valuation tool in which, instead of the three previous years, a forecast of the years following the valuation date determines the value of a company. However, this procedure does not apply to taxes. Rather, this procedure is suitable for sales negotiations, the acquisition of investors or the procurement of loans.

4.3. Multiplier methods

Some industries allow for a specific view of the value of companies belonging to them. Similar to the simplified income methodology, these valuation methods take a factor by multiplying the company’s annual sales instead of profits to determine the company’s value. In fact, these so-called multiplier methods can also be used for tax purposes.

4.4. The asset value method

The asset value method is basically only a supplement to other methods. This is because it serves to determine whether a company that has negative assets according to other methods of valuation may contain individual assets that lead in their sum to a positive company value. Thus, the property value procedure has a control function, especially in the tax context.