Company acquisition and valuation under german law
Methods of determining the purchase price for companies and company shares in Germany
In the case of a planned purchase of a company or shares in Germany, the buyer usually does not have all the necessary information concerning the value of the company. Moreover, the seller often tries to conceal negative information about the company and to give undue space to positive aspects in order to attract the buyer's interest. Regardless of the information asymmetries that often exist between business buyers and sellers in german practice, businesses per se are the most difficult assets to value due to the complexity and multitude of factors that determine value.
Here you will find information on the essential aspects of investment or business valuation for corporate transactions as well as an overview of important negotiation strategies in Germany.
For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.
Evaluation from our expert!
In our team, tax advisor Martin Stürmer takes care of the company valuation for the determination of the purchase price. As a specialized expert, he works together with our lawyers in german corporate law. You can also engage him independently of a legal mandate.
Ask for a quote for a business valuation or a cost-effective indicative business valuation:
Legal expertise in company valuation and acquisition of shareholdings in german law
Our team of lawyers, certified specialists and tax advisors has been assisting with company acquisitions and shareholding transfers as well as valuations of companies in a wide variety of situations for many years. Our range of work can be described as follows:
- Carrying out company valuations in accordance with standard market valuation procedures and valuation methods;
- Expert opinions in connection with a dispute in or out of court concerning a share or company value;
- Accompanying acquisitions and disposals of companies and participations in companies (M&A);
- Capital increase measures, contributions in kind and transformation cases, in particular mergers and demergers according to the German Transformation Act (UmwG)
- Planning of corporate succession
- Tax planning of shareholding transfers
An overview of other areas of german corporate law, M&A and our services can be found here: M&A, company acquisition, transformation
Importance of the company value
In german practice, there is no such thing as an absolute, objective company value. Rather, it depends on various factors, including subjective ones. It is not uncommon for the company valuation in Germany to be one of the decisive points in various M&A measures, especially in contractual negotiations on company acquisitions - and often also the most conflictual point of contention. When it comes to the question of valuation, the conflicting economic interests of the parties involved regularly become particularly apparent in german prectice.
The value of a company or an investment in Germany can only ever be determined on the basis of all value-relevant information about the company to be acquired. The poor information situation on the buyer side is one of the major hurdles in german company acquisitions. The so-called information asymmetry between the buyer and seller sides must be eliminated as far as possible through a mostly extensive buyer-initiated examination of the target company (due diligence). As part of the due diligence process in Germany, the buyer examines all relevant information and risks in order to gain a picture of the company's earning power and value. Finally, due diligence makes it possible to preserve evidence in the event that undisclosed risks materialize after the company is acquired.
Relevant aspects in the acquisition of a company in Germany
However, it must be taken into account that not only the topics of company value and purchase price dominate the contract negotiations between the parties in german practice. The buyer will demand guarantees from the seller, especially in the case of company risks that are difficult to assess, which can lead to seller liability regardless of fault. On the other hand, the seller will be interested in disclosing all liability-relevant aspects in order to avoid his later liability. The guarantee agreements in the german company purchase agreement (so-called representations and covenants) usually take up a lot of space. In the contract negotiations, these guarantee catalogs are often the subject of tough negotiations. In addition to the guarantee clauses, clauses concerning a liability exemption amount, liability exemption limits and liability maximum amount are very relevant in german practice, especially for the seller side (for more information, click here: Liability & Guarantee in the Acquisition of a Company). Finally, the statute of limitations for warranty claims is also regularly clearly stipulated in the company purchase agreements. It should be noted, however, that liability risks also lurk for the buyer side in the course of the company takeover. In the area of german corporate law, violations by the seller of the principles of capital raising and capital maintenance can lead to buyer liability. In addition to the economic risks, the legal risks must always be examined as part of the due diligence process.
In addition to the purchase price amount and liability issues, many other risk distribution issues also play an important role in the german company purchase agreement. It is not uncommon for the parties to even resort to so-called purchase price adjustment clauses and earn-out clauses (establish a variable purchase price). By means of such clauses, purchase price ideas are brought together on the basis of factors to be agreed (see Purchase Price Clauses in Company Acquisitions).
Severance clauses in the german articles of association
Severance clauses are found in almost all partnership agreements in the event that a shareholder loses his partnership position. The severance payment provisions then grant the shareholder concerned a claim for severance payment against the company. They often standardize special valuation procedures on the basis of which the amount of the severance payment must be measured in german practice. Read more:
For sales of shareholdings and transfers of companies, these compensation clauses under german company law generally play no role. The purchase price is negotiated between the buyer and seller. To this end, the buyer side will carry out a company valuation in advance.
Only when the buyer is aware of all market-relevant, business, legal and tax factors and risks of the target company can he succeed in making a meaningful determination of the company's value in Germany. Only from this well-informed situation can the buyer conduct the purchase price negotiations. In german practice, difficulties arise primarily because there is no one correct valuation method for a company. Various marketable valuation methods have become established:
Marketable valuation procedures and valuation methods in Germany
If a company has a stock market value or there has been a recent acquisition of a shareholding, the company or shareholding valuation is usually not a major problem, as corresponding share and purchase prices can serve as a reference. In other cases, a separate company valuation is required. There are countless valuation methods for the company valuation or the investment valuation in Germany. Among the most common are the following standard methods:
- Income capitalization approach according to IDW S 1: This income capitalization approach focuses on the future revenue surpluses of a company when valuing it. The capitalized earnings value method and the DCF method described below are the two methods that are used equally for conducting company valuations in accordance with IDW S 1, the standards of the Institute of Public Auditors in Germany. This method adjusts for extraordinary factors and uses past operating results to forecast future earnings, incorporating knowledge of, among other things, the size and growth rate of the industry, the position of the company's own products on the market, customer structure, etc. Details on the income approach according to IDW S1 can be found here: IDW S1 (following soon)
- Discounted cash flow method (DCF method): The DCF method determines the enterprise value by discounting the future cash flows to the company owners, which are determined within the scope of a long-term corporate planning. Cash flow is defined as the balance of cash inflows and outflows in a given year. The DCF method uses two different valuation methods: The net approach (so-called equity method) and the gross approach (so-called entity method). Detailed information on the discounted cash flow method: DCF method (following soon)
- Simplified income capitalization approach: According to the Valuation Act (regulated in §§ 199 ff. BewG), the simplified capitalized earnings method is a possible method for the valuation of sole proprietorships, partnerships or corporations. Like many other methods, the simplified capitalized earnings method assumes that the value of a company results from its ability to generate future surplus income. The simplified capitalized earnings method is highly relevant in the area of inheritance tax law. It should be noted that a valuation using the simplified capitalized earnings method leads to high company values. For M&A practice, the statutory capitalized earnings method therefore often plays a subordinate role. Further information: simplified capitalized earnings method (folllowing soon)
- A distinction must be made between the total valuation method (the company to be valued is understood as a valuation unit) and the individual valuation method (market value of all tangible and intangible individual assets taking into account liabilities, e.g. the so-called net asset value method). In addition, there are also mixed methods in practice. In business practice, especially in the case of smaller units, rough calculations are often made.
Please do not hesitate to contact our lawyers or tax advisors if you need a contact person for your questions regarding the purchase of participations or the valuation of companies. From our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne we are also happy to advise you throughout Germany.