To determine the value of a company, there are different approaches. The company valuation method also depends heavily on its purpose. Thus, in tax law, the company valuation in the simplified income value method is a common procedure. In fact, it applies, for example, to inheritance tax and gift tax or to the exit tax. The profits of the three financial years preceding the valuation date are relevant, with both additions and reductions affecting the respective operating result. Their average profit is then subject to a general capitalization factor of 13.75 as annual income. But other company values can influence this. However, in order to exclude a negative or otherwise unrealistic value of a company, in addition to the simplified income-value method for control, another method of valuation of a company must be used, namely the substance-value method. Because the latter represents the minimum value of the company.

There are a variety of reasons that require determining the value of a company. Thus, a determination of the company value is necessary, especially in negotiations with donors. Also in disputes about shares in a company – whether on the basis of an inheritance, a takeover or an exclusion of shareholders or in the case of a divorce – a company valuation takes place.

One of the most frequent occasions is also the determination of the selling price that can be set for a company. But here, too, there may be some differences, depending on the form of company. So it is quite easy for listed companies to determine the value. Because the value results from the value of the shares at a certain time and their number. After all, the value in this regard is exactly the price that a buyer interested in the company is willing to pay. However, if you do not want to buy or sell a listed company but another company, then the thing looks a bit different. Because here there is no constant comparison on the basis of a lively trade in company shares. So again, you need a different company valuation process.

But tax law also knows reasons that require a company valuation for tax purposes. Of course, there are legal regulations on how to evaluate a company. After all, the same law should apply to all (taxpayers). So the legislator has determined that one should generally apply the so-called simplified income value method for this purpose.

The simplified income value method goes back to the actual income value method, which is recognized in the free economy or in valuation theory as a method for valuing companies. However, as the name suggests, some simplifications apply to the simplified income value method. The simplifications are particularly effective in the area of profit determination itself and the evaluation of capital costs.

Since the simplified income value method is part of the tax regulations for corporate valuation, we have to deal with them first. First of all, we refer to the corresponding law, namely § 200 BewG. This paragraph contains the basic instructions on valuation. For example, this legal provision refers to the following three paragraphs concerning the precise calculation methods for the simplified income method. However, § 199 BewG also contains some further provisions for the application of the simplified income value method. And § 200 BewG also contains exceptions or additions to the standard procedure. We shall discuss this later. But first we present the standard procedure for the simplified income value method.

In order to determine the taxable value of a company, it is necessary to use the simplified income method. According to § 200 BewG, the basis for a company valuation with regard to taxation is “the sustainable annual income in the future”. The law uses the term base value for this purpose, which is the profit within the meaning of § 4 (1) EStG. The profit determination takes place by comparison of assets over a balance sheet. However, companies that determine their profits by revenue surplus in accordance with § 4 (3) EStG are also included.

This is based on the operating result of the three financial years preceding the valuation date. However, if the interim result of the current marketing year already shows that it is important in terms of the future development of the sustainable return on business, then instead the yield of this still ongoing marketing year must be taken as an approach for the third of the three marketing years to be considered. This can lead to both higher and lower enterprise value compared to the standard method.

In addition, legislators also had to create regulations for the simplified income value method for special exceptional situations. If, for example, a company was founded only recently, less than three years ago, then you have to set a correspondingly shortened period. The same also applies if there was a fundamental change in the company and its economic or other circumstances within this period which affects the annual income.

However, if the creation is due to a conversion process, the operating results of the original companies must be included in the evaluation. The calculation must be carried out in the same way as it is carried out to determine the profit of the company that is now being assessed. As a result, the legal form of the valuation object may also play a role. If it affects the operating result, then the previous operating results must be adjusted accordingly in the company valuation by correction.

The simplified income method has some special rules that influence the relevant annual income of the entity being measured. This can be done either by adding or by cutting back. Special balance sheets or supplementary balance sheets, on the other hand, are excluded from the company valuation by the simplified income method.

3.2.1. The Simplified Income Value Method: Add-ons

The list of additions for the simplified substance value method is quite extensive. But this is also understandable, since there are also a whole series of possibilities with which one can influence the tax profit.

This applies to valuation haircuts, partial depreciation, investment deductions, tax-free investment allowances, one-off capital losses, extraordinary expenses and tax-free provisions. Special depreciation of all kinds must also be added again, because only the regular linear depreciation for wear does not constitute a reason for an addition. Furthermore, 30% of the income taxes incurred must be added. These include corporation tax and ancillary levies as well as business tax.

Losses on investments in other companies that are part of the necessary operating assets of the company to be measured by the simplified income method are also affected by the addition.

In addition, income that produces non-operational assets must also be added.

In the case of the investment allowances already mentioned, it should be noted that they are only included if they continue to apply to the same extent in the future, or that they are at least likely.

In addition, all other asset reductions without economic reference are to be added, if these are significant for the future annual income. This also includes reasons arising from company law.

3.2.2. The Simplified Income Value Process: Reductions

In return, you can also deduct some amounts from the profit. These include extraordinary income or one-off capital gains, taxable amounts through profit-increasing release of tax-free provisions and partial value write-offs. Similarly, income from investments in other companies that are part of the operational assets is reduced. Similarly, profit-relevant investment allowances are treated if no other such allowances of the same size are likely in the future. In addition, income resulting from the refund of income taxes is also reduced.

A special aspect of the cuts are entrepreneurial wages (managing director salaries), more precisely the lack of them. Because if an entrepreneur who works for his company is in principle entitled to an entrepreneur's wage, but is partially or completely waived, then one can still deduct a fictitious entrepreneur's wage from the profit for the extended income value method. Of course, this amount must also be appropriate. In addition, this rule also applies if other family members work for the company in a similar more or less voluntary manner, even if in other functions.

Incidentally, here, too, all yields that are not economically related, but can still be the basis for future annual yield, are cut. The Valuation Act also includes company law influences on this.

3.2.3. The simplified income method: calculation of annual income

After we had to take into account some sometimes quite complex issues in the form of additions and reductions on the basis of the baseline, the calculation of the annual income itself is quite simple. In this way, the operating results of the three relevant years, calculated in accordance with the rules explained above and adjusted for fictitious taxes, are first summed up. And then you divide the sum by the number of years considered to find an average value, usually also by three. This average value is then also the annual yield to be used for the further calculation in the simplified income method.

The next step is probably the easiest. Because it comprises a simple calculation operation, namely the multiplication of the annual income by a legally defined capitalization factor. This is 13.75 and corresponds to a capitalisation rate of approximately 7,27 %.

In order to move from income value to enterprise value, you have to add a few more values to the income value. Assets that do not contribute to the return of the entity under assessment also affect the value of the company. After all, an entrepreneur wants to achieve a monetary return for this when selling his company. So in this step you add all those assets and influences that were previously out of consideration. Of course, the respective common values are used for this purpose.

This is especially about non-operational assets and associated debts. Similarly, assets invested in the company during the preceding two years are considered neither operationally necessary nor contrary. This is because the legislator assumes that these young assets have not yet been able to make a discernible contribution to the company’s income. Moreover, if the entity under assessment did not receive any profits from the participation in other companies during the period under consideration (for example, because of losses or because of significant profit retention), then these participations should also be added.

Now let’s move on to the constraints that the simplified income value methodology as a method of valuation can be subject to. Under certain conditions, the use of the simplified yield method does not seem to make sense. In principle, this applies in all cases where the simplified income value method delivers unrealistic company values. This is the case, for example, when the entity under assessment assumes negative values. However, even if, after the company valuation, a sale of the company or its shares results in a real common value that deviates from the previously determined company value in the simplified income method, a correction of the previously calculated company value can be carried out. Finally, the actually ascertainable values are more relevant for tax purposes than purely methodologically determined ones.

So the simplified income value method – as sophisticated and logically comprehensible as it may be – is anything but infallible. Therefore, the legislator uses a further method in the company valuation for tax purposes in addition to the simplified income value method. In this comparison method, the so-called asset value method, all assets of the company to be valued are added up. For this purpose, the common value of all assets and assets is used to determine the value of the company that could be achieved by a fictitious sale of the individual assets. However, if this material value is higher than the value of the company established by the simplified income method, then the material value is decisive for the calculation of taxes.

However, if an entrepreneur has reason to believe that the simplified income-value method provides an enterprise value that is far above the actual market value, the objection can be presented to the competent tax office. However, one should also be able to present a separate calculation model based on the income value method and explain its preferred application. As a rule, auditors prepare such company valuations via the so-called IDW S1 procedure.