The most common methods for valuing companies are
- Simplified income capitalization approach
- Multiplier method
- IDW S1 method (capitalized earnings value method or DCF method)
The simplified income capitalization approach in accordance with §§ 199 ff. BewG focuses on the determination of tax bases for inheritance and gift tax purposes. It is a past-oriented valuation method that is prescribed for unlisted corporations as well as for sole proprietorships, partnerships and freelancers. If it does not lead to an appropriate value, the taxpayer must have their company valued by a company valuation report in order to prove a lower tax base to the tax office.
The multiplier method is a very simplified and cost-effective way of determining the company value. The enterprise value is calculated by multiplying a value figure such as sales, EBITDA, EBIT, cash flow or net income by a multiplier derived from comparable companies. If, for example, it is known that in the past an average of 6 times the EBIT was paid for a company in a certain size category in a certain sector, this is applied to the company to be valued in order to roughly determine the enterprise value. To determine the value of the shareholders, the financial liabilities are deducted. This method is often used in the context of M&A deals or when clients only want to know an initial general indication of the order of magnitude of the achievable company value. The quality depends on how thoroughly the basic data has been analyzed and adjusted. If, for example, extensive hidden reserves are released in the underlying base year and these are not adjusted, the company value will be much too high.
A valuation in accordance with valuation standard S1 of the Institute of Public Auditors in Germany (IDW S1) is often prepared for expert purposes and documented in an expert report. Such an expert opinion meets the highest standards of accuracy and can be used, for example, to prove a certain value to a court or the tax office. According to IDW S1, the enterprise value is generally derived from the financial surpluses generated by the continuation of the company and the sale of non-essential assets. The financial surpluses available to the company owner or investor in the future are calculated taking into account company taxes and personal income taxes incurred by the owner and discounted to the valuation date. A distinction is made between the capitalized earnings value method and the discounted cash flow method, which should theoretically lead to the same company value. In Germany, the capitalized earnings value method is more widespread, while the discounted cash flow method is more common abroad.
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