A company valuation in line with the market is almost impossible when applying the Valuation Act. The inheritance tax reform of 2009 also fundamentally changed the valuation of businesses: Since then, the market value - i.e. the sale price attainable on the open market - has applied. As a consequence, family businesses must either have an expert opinion prepared or apply the simplified capitalised earnings value method. In a statement, the DIHK criticises the previous approach and also calls for a corresponding correction of the valuation law in connection with the new regulation of inheritance tax.

The current valuation law does not take into account the close contractual ties of family businesses with regard to the appropriation of profits and the commitment of financial resources in the business or even in the transfer of company shares. This prevents an outflow of capital from medium-sized businesses, which is conducive to safeguarding jobs. In addition, such shareholder agreements prevent short-term profit-seeking and thus serve the sustainability of the enterprise. According to the DIHK, the result of the current valuation practice is unrealistic market values and thus company valuations that are not in line with the market. While this is still compensated for under current inheritance tax law by exemption regulations, a noticeable disadvantage is to be expected in the future due to the taxation of part of the business assets.

Market-oriented company valuation not ensured by legal situation

Instead of a valuation report, many family businesses use the simplified capitalised earnings value method to determine the market value for cost reasons, in which a capitalisation factor is derived from the Bundesbank’s base interest rate. While this factor was still 11 when the procedure was introduced in 2008, it has since reached 18.2 due to the fall in interest rates. Despite its simplicity, the procedure leads to completely inflated market values in the current interest rate environment. Taking the example of a rural retailer with a profit after tax and a fictitious entrepreneur’s salary of EUR 55,000, this results in a value in the millions.

On the basis of the current cabinet draft on inheritance tax, the statutory business valuation is becoming a potentially existence-threatening problem for many family businesses, according to the DIHK. For this reason, the DIHK is calling for a correction of the valuation law at the same time as the adjustment of the inheritance tax, which takes into account the restraints on disposal of business assets in the context of the valuation and also adjusts the capitalisation factor in such a way that even with low interest rates there are no excessive moon prices and thus company valuations in line with the market.

Business value appraisal accepted by tax authorities

Currently, the capitalised earnings value method is a procedure accepted by the business community, the chambers of commerce and, above all, the tax authorities for defining a company valuation that is as market-oriented as possible. This method determines the company value by adjusting the past results for special effects and subsequently forecasting a development of the company that is as plausible as possible. This makes a conclusive valuation report a good alternative to the methodology defined in the Valuation Act.

“As a consequence, the market-oriented company valuation usually leads to a lower tax burden for the heirs and thus preserves financial leeway for future investments,” says the Frankfurt-based business succession advisor Thomas Dörr. According to his experience, income value appraisals accepted by the tax authorities can be prepared with realistic assumptions without major financial and time expenditure. This investment in a company valuation in line with the market often pays off simply through the lower tax demand from the tax office when the company is transferred to the next generation.

The full press release of the DIHK you will find here.