Business valuation

Business valuation is an essential process aimed at determining the economic value of a company. In Germany, there are certain concepts and methods that are frequently used in practice. In this article, we will focus on business valuation in the Federal Republic of Germany, with a brief mention of the fact that other methods are known in other countries.

Introduction

In Germany, business valuation is often a decisive step in company acquisitions, mergers, investments or for internal analysis. The valuation takes into account various factors such as financial performance, market conditions, competitive position and more.

Basic concepts

Substance value

The net asset value is the value of a company’s assets less its liabilities. It is particularly relevant when a company consists mainly of tangible assets.

Earned value

The capitalized earnings value is based on a company’s ability to generate profits in the future. It is particularly relevant for companies focused on growth and profitability.

Business Valuation Methods in Germany

Income capitalization approach

In Germany, the capitalized earnings method is one of the most frequently used methods for business valuation. It is based on discounting future earnings or cash flows to their present value. The method takes into account both current earnings and expected future earnings.

Discounted Cash Flow (DCF)

Although the DCF method is widely used internationally, it is also frequently used in Germany. It is similar to the income approach, but focuses more on cash flows than earnings.

Multiplier method

The multiples method values a company by using certain ratios such as the price-earnings ratio (P/E ratio) and comparing them to similar companies. In Germany, the EBITDA multiplier method is frequently used.

Substance value method

The net asset value method is often used in Germany for companies whose value lies mainly in their tangible assets. It calculates the value of a company by determining the market value of its assets subtracted by its liabilities.

Settlement procedure

The comparison method values a company by comparing it to similar companies that have recently been sold.

International perspective

While the above methods are widely used in Germany, there are different approaches to business valuation in other countries. For example, in the U.S., the market approach and the asset approach are widely used in addition to the income approach (similar to the income approach).

Stuttgart procedure

Another method used in Germany for business valuation is the Stuttgart method. This method is mainly used for the valuation of companies in inheritance and gift tax cases. This is a simplified capitalized earnings method developed specifically for tax valuation purposes.

The Stuttgart method is based on the assumption that the value of a company is determined by its ability to generate earnings in the future. However, it also takes into account the intrinsic value of the company. The method uses a capitalization factor to calculate the capitalized earnings value and also takes into account the net asset value of the company.

The formula for the Stuttgart procedure is:

Enterprise value = (average annual earnings x capitalization factor) + net asset value

The capitalization factor is usually specified by the tax office and takes into account the interest rate and other factors. The net asset value is calculated as the value of the company’s assets less its liabilities.

It is important to note that the Stuttgart method is used primarily for tax purposes and may not be the most accurate method for determining the market value of a business.

Combination of methods

In practice, it can also be useful to combine several valuation methods in order to obtain a more comprehensive picture of the company’s value. For example, the capitalized earnings method can be used in conjunction with the net asset value method to consider both the future earnings and the current assets of a company.

Conclusion

Business valuation is a multi-layered process involving various methods and concepts. In Germany, the income capitalization approach, the DCF method, the multiplier method, the net asset value method and the Stuttgart method are common methods. The choice of the appropriate valuation method depends on several factors, including the purpose of the valuation and the nature of the business.