The IDW S1 procedure is a method used for business valuation. The IDW S1 procedure only applies outside tax law. Nevertheless, it is widely recognized as a model for company valuation. This is because the IDW S1 methodologically captures the company value under very realistic assumptions. Thus, the future expected returns of the company to be evaluated are the focus of the considerations. In this way, a reliable forecast of the expected economic strength of a company is obtained. And this is the center of the actual interest for many purposes. When buying or selling a company, a well-founded forecast, such as that offered by the IDW S1 method, is worth more than an analysis based on past periods in the income value method.

The value of a company can be of interest to an entrepreneur for very many reasons and at correspondingly different times. In addition to the determination of an appropriate sales value or the valuation in the course of a dispute over inheritance, a company valuation can also, for example, have the inclusion or departure of a shareholder. Furthermore, an assessment of its value may also be relevant in a liquidation of the company. And of course there are also a whole series of tax reasons, for example the exit tax, which provide for a company valuation. But one of the most common reasons in everyday life is the company valuation in the context of negotiations to take out loans or investors, for example in the startup scene. Also in the case of an exit, such as the bottle mail SE, the IDW S1 method comes into consideration. A distinction is made between a whole series of evaluation methods, which are suitable for evaluation depending on the occasion or starting point. One of these methods is the IDW S1 method.

The IDW S1 procedure is a standard established by the Institute of Auditors to offer a realistic company valuation as an alternative or supplement to existing valuation methods. The IDW S1 method is based on the general yield value method. In the IDW S1 process, the income value of a company is also the focus of considerations. The method is similar.

However, the IDW S1 procedure does not apply for tax purposes. Although from the point of view of many entrepreneurs it allows a more realistic representation of the company value, in tax law the simplified income value procedure is preferred. This is mainly due to the fact that with the latter method you can obtain the vast majority of data from the previous profit determination. And this is precisely where the IDW S1 method differs significantly from the methods usually used in tax law (simplified income value method and substance value method).

If you make a company valuation using the IDW S1 method, then you have to distinguish between three different purposes at the beginning. On the one hand, one can strive for a company valuation in an objective interpretation. This is advisable, for example, if you want to represent the company value thus determined vis-à-vis third parties. Furthermore, a subjective assessment can be considered. This view is of interest if only the perspective of the entrepreneur on the future development of the company and its potentials are in the foreground. And thirdly, the IDW S1 procedure may serve the purpose of showing an agreement value in a dispute about the company.

In accordance with the three purposes, one also distinguishes three functions that the experts perform. Thus, a neutral expert is commissioned with the objective evaluation in the IDW S1 procedure. Also neutral, but striving for balance, is an arbitrator who determines an agreement value in a dispute. The subjectivized company valuation, on the other hand, comes to a consultant who prepares the report in order to analyze the company from the subjective point of view of the entrepreneur. Because only on this basis can his advice comprehensively consider all aspects.

To underline the importance of this distinction, we refer to the requirement to explicitly mention the purpose of the evaluation and thus the function of the expert in the report. This also makes it known to third parties under which aspects the expert report was drawn up.

For example, the IDW S1 process strives for an overall evaluation of companies. Instead of an analysis of the values of the individual assets, the focus is on the result of the interaction of all economic units of a company. However, one must also distinguish between operationally necessary assets and all other units.

Consequently, the IDW S1 procedure requires a separate valuation of non-operational assets. All assets that do not or do not contribute to the company’s profits must be valued at their common value, which would be obtained in the event of liquidation. After all, the company can separate from them at any time without affecting the return. Because the IDW S1 method ultimately assesses the net income that entrepreneurs or shareholders of the company under assessment can expect, these assets must also be recorded with the common net value.

The IDW S1 procedure also focuses on forecasting the net income of entrepreneurs or shareholders in the company. This therefore requires that one deliberately disregards the precautionary principle prescribed in the Commercial Act according to § 252 (1) no. 4 HGB. Finally, in many aspects, this leads to a negative valuation of the company from the point of view of these valuation entities. This detail thus represents one of the most important differences from the simplified income value method. On the other hand, as we would like to show, this can also represent a significant advantage of the IDW S1 method over the simplified yield value method.

Furthermore, the IDW S1 method sets the company valuation to a specific date. This may seem obvious, but it has an important consequence. Because regardless of when the valuation in the IDW S1 procedure actually takes place, the valuation must be made from the perspective of the company relations at that time. This goes hand in hand with the adherence to another principle called root theory in technical jargon. It states that all the measures taken by the company up to the valuation date, in preparation or even planned, are important in the valuation.

If the entity under assessment has retained earnings for which there are no use plans at the valuation date, a notional distribution to shareholders is assumed. Following the net income principle, the capital gains tax of regularly 25% must be taken into account. Furthermore, a discount on the valuation date takes place.

The core of the company valuation in the IDW S1 process is the calculation of returns on the basis of interobjectively comprehensible realistic assumptions. This includes an analysis of the expected impact by the valuation date of all the business activities of the entity. Thus, an assessment of the products offered, the market situation as well as the competitive situation and their impact on the expected return of the company is also part of the scope of the analysis.

Furthermore, the company valuation in the IDW S1 procedure deals with the planning of the company. In fact, this is the actual basis for determining the value of the company. This is why internal and external planning reports of the company are the most important factor in the company valuation using IDW S1 procedures. However, these data are always subject to the dedicated analysis that experts prefer in their respective functions.

You have to take into account that the plans usually do without a tax consideration of the potential profit distributions. However, because these are decisive as a net value, one must also integrate a tax assessment here.

Of course, this presupposes that the planning data prepared by the company and made available in the context of the company valuation comply with all applicable regulations and procedures. Finally, in such cases, a forecast report shall form part of the management report. And since the latter is the subject of an annual audit by an auditor, experts invoke it.

Nevertheless, a company valuation by the IDW S1 method must also represent all data and analyses in such a way that third parties can also objectively reproduce the results, including the plausibility of the underlying assumptions. This condition after interobjectivity is for good reason a core element of the IDW S1 method. Otherwise, the valuation of companies by the IDW S1 procedure would not enjoy any credibility.

In order to establish a solid outlook on future conditions, the IDW S1 procedure also includes an analysis of past and present returns. However, this serves only to record the initial situation and as a reference for a plausibility analysis of the company valuation.

The advantages of the IDW S1 method lie in the fact that it uses a projection on future economic development as a basis for the valuation of companies. This allows a future-oriented view on the basis of the business decisions already made or to be implemented in the future. In contrast, the simplified income method, for example, provides a static view of the assets of companies based on the recent past. However, consideration of economic potentials of all kinds is thus excluded. Even if both methods are based on the determination of the yield value, the simplified yield value method and the IDW S1 method represent very different approaches. Therefore, it is hardly surprising that the two methods usually lead to very different company values.

But one must always appreciate the purpose of the methods. For the economic interests of the company, which in principle looks at future developments, this is precisely what matters. Although the legislator also wants to derive a mapping of future income with the simplified income value method, but one is subject to a certain precautionary principle, so that one only uses secure data in the company valuation. On the other hand, any approach to projected data on corporate valuation would contain the potential flaw of arbitrariness, so that it can be assumed that this would be contrary to the constitutional principle of equality.

This results in the advantage that if a company has a positive economic forecast for tax purposes, it only uses the lower company valuation, which is determined by the simplified income value method.

However, the IDW S1 method is also subject to a certain limitation. Thus, the general acceptance of the process, especially in external relations, is only given above a certain company size. The reliability of the forecast increases with the size of the company, because many economic factors, which are subject to smaller companies in everyday life, are negligible in relation to larger companies.