In the business sale, the valuation of the company to be sold is of considerable importance. Three evaluation methods are recognized here, but sometimes lead to very different results. The tax-based simplified income value method is the simplest of the three alternatives. Another valuation concept is the EBIT multiple method, whose starting point is the business parameter EBIT. The third method, the IDW S1 method, is based on international standards. It works the most forward-looking and also takes into account discounting of future profits, but is also the most complex valuation method.

1. Valuation of the company sale – Introduction

There are many aspects to the business sale, including the value of the company. After all, you want to know which selling price is reasonable and realistic. This is what both the divesting owners and potential acquirers want to know. But how exactly do you do it? Are there perhaps even alternative methods with which you can make needs-based assessments? After all, companies are usually so different in their structure and activity that one cannot expect to determine a reliable company value using a strict method. So: how to proceed with the valuation in the company sale?

2. 3 Methods of Valuation in Business Sale

In principle, there are three recognized procedures for company valuation in Germany. They are thus also allowed for a valuation during the company sale. The preferred variant under tax law is certainly the simplified income value method. Financial authorities are guided in particular by this method, because it is so standardized in valuation law. Then, as a second option, there is the valuation according to the so-called multiplier method, which is known as EBIT multiple company valuation because of the valuation of EBIT with a factor. EBIT is the internationally common abbreviation for earnings before interests and taxes, i.e. the gross net profit. And as a third method, an assessment according to IDW S1 can be applied in the company sale. This method is used in particular by auditors because it is based on the internationally accepted IDW S1 valuation standard.

In this article, we now go chapter by chapter into the individual calculation methods that can be used for company valuation. We also point out which method tends to lead to which outcome. Because so much is already betrayed: the methods provide different values. Depending on whether a high or a lower valuation is desired, one or the other valuation method may prove to be a more sensible approach.

3. Valuation at company sale: simplified income method

As already indicated, the most well-known method for valuing companies among tax law experts is the simplified income method. It is more precisely regulated in § 200 BewG. § 199 BewG is often cited here, but this standard is only an indication of when the simplified income value method should be applied for tax purposes. In addition, §§ 201 to 203 BewG also have significance in this context.

3.1. Methodology for valuation under the simplified income method

The simplified income method first determines the profit after tax for the last three years before the valuation date. If in the current year, in which the valuation date is, it already appears that the profit is more relevant than that of three years ago, then the current result is taken instead. From this you form an average value, but you have to consider some points. Finally, § 199 of the BewG stipulates that the simplified income-value method should only apply if there are no manifestly incorrect results. This applies at least for tax assessment purposes. In addition, it should be an evaluation of the sustainable results achievable in the future. If one has to assume, for example, that in the future the sustainably achievable result will differ significantly from that which was calculated via the average value, this method is unsuitable for providing a reliable valuation when purchasing a company.

However, if such a deviation can be reasonably excluded, the average value is multiplied by the multiplier of 13.75 specified in § 203 (1) BewG according to § 200 (1) BewG. This then results in the enterprise value according to the simplified income value method. For a company that consistently generates annual profits of EUR 500,000, you come to an enterprise value of EUR 6,875,000.

3.2. Advantages of the simplified income value method

In most cases, however, this is a company value that is relatively high. So if you want to set a company value quite high, such as when selling your own company, this is probably the preferred valuation method. In addition, the simplified yield value method has the advantage of following the simplest calculation rule among all permitted valuation methods. It is therefore also easy and reliable to determine by tax consultancy firms.

4. Valuation at the company sale: EBIT multiple

The valuation of companies in the company sale using EBIT multiples is a much more realistic valuation method. The basis of the valuation is first of all the sustainable company result adjusted for taxes and interest as well as a fictitious or real entrepreneur wage. A factor is applied as a multiplier. The factor is based on different criteria that correspond to expectations for further entrepreneurial development. High multipliers are used, for example, in innovative companies or startups. The sums that investors invest in such companies are often correspondingly high because they expect correspondingly high dividends or profits in the sale of their shares in the future.

In addition, the factors are primarily geared towards listed companies that have a clearly secure financial standing than small and medium-sized enterprises (the so-called SMEs). Therefore, especially in the latter cases, one should be very careful with the approach of prestigious factors. In any case, a factor between 10 and 20 is only realistically acceptable for successful exceptional companies. For an SME, on the other hand, a factor of four to six is already a very good value.

However, the factor is also determined by many other criteria that are individually related to the company to be evaluated. These include, among other things, the industry in which a company operates and its forecast development. This is in turn related to the market situation, especially the competition there.

In any event, the valuation of the company sale by means of EBIT multiples usually leads to a lower value of the company than the simplified income method. Therefore, when it comes to the highest possible company value, the EBIT multiple is only a limited suitable choice. However, it should be noted that the EBIT multiple nevertheless leads to more objective company values, because many important value-influencing characteristics are taken into account when selling companies.

5. Valuation at the company sale: the IDW S1 procedure

Somewhat more complex than the simplified income value method and the EBIT multiple method is the calculation of the enterprise value on the basis of the so-called IDW S1 method. This method is fundamentally different from the previously explained methods for valuing companies in the company sale. In the IDW S1 process, both the predictable development of the company and a discount of the expected profits are taken into account. Also noteworthy is the period of more than three years over which this forecast is made by using the IDW S1 method.

5.1. Determination of the discount rate

The basis for the valuation according to IDW S1 is the profit after tax. In addition, the discounting of future expected profits takes place in accordance with the provisions of the BGB on the basic interest rate. In July 2025, the Bundesbank set the base rate at 1.27% (previously it was still 2.27%). However, the base rate for the further valuation according to IDW S1 is subject to an adjustment via a risk interest rate, which is added to the base rate. A percentage of 7% is realistic. But the risk interest rate is also variable via a beta factor. This allows you to react to individual circumstances in connection with the company being evaluated. In short, a discount at an interest rate of about 10% is a quite realistic value.

5.2. Discounting projected gains

Now you discount the profit expected in the first year after the valuation date with the interest rate calculated according to the above methodology. This is also repeated for the following two years. Next, one goes one step further and performs a discount on the profit projection continued eternally into the future from the fourth year. In addition, the profit expected in the fourth year is multiplied by one hundred times the interest rate. For example, with a profit of EUR 500,000 and an interest rate of 10%, this would be EUR 5 million (EUR 500,000 x 10% x 100 = EUR 5,000,000). This calculation result is also discounted. Then you add the results of the four years and get in this way the value that can be used for the company sale by valuation according to the IDW S1 procedure.

6. Company valuation for company sale – Conclusion

We have presented you with three quite different methods for evaluating companies when selling companies. The simplified yield value method is probably the simplest method. It also provides a relatively high enterprise value. This sounds obvious, because the tax authorities naturally want the highest possible profit in the taxation of corporate transactions. But even entrepreneurs who want to sell their company can look forward to such reviews.

However, the simplified income value method is also a valuation method that in principle does not take into account the individual characteristics of companies. This is the case with the EBIT multiple and the IDW S1 method. Therefore, one of these two calculation methods should lead to a more realistic valuation of the company sale. Of these two methods, however, the evaluation according to IDW S1 is the much more complex method. Since it is usually carried out in particular by auditors and they have to deal with many factors in their reports, the commissioning of such a report is at the same time the highest effort compared to the other two valuation methods. However, the IDW S1 method has an advantage over the other two evaluation methods. After all, it is the most respected procedure by the tax courts.