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Unlike the purchase or sale of shares in publicly traded companies, the transfer of ownership in small and medium-sized enterprises is almost always associated with a high degree of emotional involvement. The reason for this is that, in most cases, the successor will not only take over the shares but will also be actively involved in the day-to-day operations of the business. Accurate valuation of the company in the context of a share transfer is therefore always of central importance.
The Simplified Income Approach Often Leads to a Tax Trap
Tax authorities continue to favor the simplified income approach as the quickest method. However, this methodology often leads business owners into a tax trap. The reason is the flat-rate capitalization factor, currently set at 13.75, which is multiplied by the average, normalized annual net income of the last three fiscal years and generally results in significantly inflated company valuations. Furthermore, micro-enterprises, large medium-sized companies, and all industries are treated equally. The only recognized alternative method in Germany is valuation in accordance with the principles of IDW S1.
According to this method, the enterprise value is determined based on a so-called “future earnings value,” which in turn is calculated using (expected) future cash flows that are discounted to the valuation date. The concept thus follows the principle of inflation. There is a risk of a “crystal ball effect,” as uncertain future earnings are required to determine the company’s current value.
Many articles of association still stipulate the “Stuttgart Method” as the method for valuing shares. This method was ruled by the Federal Constitutional Court to be inconsistent with the Basic Law in the context of inheritance tax and was therefore abolished as of January 1, 2009, as part of the inheritance tax reform. It is therefore questionable whether this method is suitable under corporate law for determining the value of a company.
When selling shares, it is advisable to determine the market value
These methods are justified to meet the requirements of the tax authorities or to serve as an arbitration mechanism for determining value (e.g., in the case of a transfer to children). However, if no internal successor is available and the sale of shares takes place between unrelated third parties, the interplay of supply and demand results not in a subjectively influenced enterprise value, but in a purchase price determined by the market.
To this end, it is advisable to contact all direct competitors and potential buyers from related industries to assess potential interest in the acquisition. Consequently, however, it is essential to maintain anonymity to the greatest and longest extent possible so that the intention to sell does not become public knowledge in the market. Therefore, when planning succession through the sale of shares, it is recommended to conduct the business valuation using an anonymous market valuation, as this takes into account all subjective value drivers of the prospective buyers.
