Multiples

Term and Definition: Multiples in the Legal Context

The term multiples refers in legal and economic contexts to a valuation method that is primarily used to assess the value of a company or specific assets. Multiples are based on comparing certain key figures that reflect the ratio between a company’s value (such as enterprise value, equity value) and a performance-related measure (such as sales, profit, EBITDA). In law, taxation, and accounting, multiples are a central tool for substantiating valuation approaches and for deriving market prices for shares, corporate transactions, and intangible assets.

Significance and Applications of Multiples in Law

Company Valuation and Multiples

Multiples are a key instrument in business valuation. Their application is particularly relevant in the following situations:

• Company acquisition and sale: In the case of share or asset deals, companies or business units are valued based on market-oriented multiples.
• Corporate law: Multiples are used in matters of compensation and redemption, as well as for the valuation of shares during share transfers.
• Tax law: To determine the fair market value of a company or company share, especially for inheritance and gift tax purposes, multiples are used as market value indicators.
• Accounting law: In impairment tests, for example when valuing shareholdings or intangible assets, multiples provide a benchmark for comparison.

Types of Multiples

In practice, a variety of multiples are distinguished:

• Equity multiples (Equity multipliers): Ratio of equity value to annual profit (price-earnings ratio, P/E ratio) or other key figures.
• Enterprise value multiples (Enterprise value multipliers): Ratio of enterprise value (EV) to EBIT, EBITDA, revenue, or cash flow.

Legal Classification and Significance of Multiples

Legal Principles and Reference Points

Statutory law does not expressly define the term “multiples.” Nonetheless, the method is both directly and indirectly applied across various legal areas:

• Valuation law (§§ 199 ff. BewG): The Valuation Act regulates the valuation of assets, specifically companies, for tax purposes. Here, multiples are used to estimate the fair market value by using comparable values.
• Commercial accounting law (HGB): In the context of business valuation according to the HGB, the use of market-oriented multiples for impairment tests is permissible, provided no individualizable values are available.
• Corporate law (AktG, GmbHG): In disputes regarding compensation and share valuation (for example, squeeze-out or exit from the company), market-oriented valuation methods, including multiples, are taken into account.
• Fiscal authorities and court practice: Administrative guidance and court decisions often advocate validating valuation approaches using available multiples.

Legal Requirements for the Application of Multiples

Selection and Applicability of Comparative Values

The application of multiples in the legal context presupposes the selection of suitable comparable companies or transactions. The following legal requirements are particularly relevant:

• Industry and size comparability: Multiples should relate to companies that are comparable in terms of industry, size, growth prospects, and risk profile.
• Data quality: Reliable, verifiable comparative figures must be used to ensure the comprehensibility and transparency of the valuation.
• Recency: The data underlying the multiples used should be as close as possible to the valuation date.

Assessment of Evidence and Traceable Derivation

Courts, tax offices, and authorities regularly review the traceability and substantiation of the chosen multiples. Valuation reports and expert opinions should transparently present and document the methodology, the selection of comparable companies, and the calculation of multiples.

Combination with Other Valuation Methods

Multiples are often one element in the so-called market data method, or are used to substantiate results from other valuation methods such as the income approach. The consideration of multiple valuation methods is legally recognized if they lead to differing results.

Case Law on Multiples

Court rulings frequently deal with the application of multiples in business valuation, especially in the context of corporate and tax law. Important aspects include:

• Recognition as a comparative value method: Courts recognize multiples as a comparative valuation method, but require a strict examination of comparability and plausibility.
• Limits of application: Especially in small or less transparent markets, multiples can provide unsuitable or misleading comparison values.
• Documentation requirement: Comprehensive justification and documentation of the selection and weighting of the multiples used is crucial for acceptance in disputes.

Tax Aspects of Multiples

In tax law, multiples are used to estimate company values, such as in cases of gratuitous transfer of company shares or assets. Particularly for inheritance and gift tax, valuation approaches often need support from external comparative figures, for which multiples may be used. The tax authorities provide guidance on the application and acceptance of multiples in the relevant valuation guidelines.

Multiples and International Accounting

According to international accounting standards such as IFRS or US GAAP, multiples may be used to determine fair values as part of the valuation process. Here too, there are strict requirements regarding due diligence in the selection, comparability, and documentation of the multiples used and their reference figures.

Criticism and Limitations of Multiples in Legal Practice

Multiples are widely used as a valuation and comparison method, but they are not without criticism. Key points to note include:

• Limited significance: Multiples reflect market data subject to current market conditions, expectations, and sometimes irrational factors.
• Lack of comparability: Especially for companies with different business structures, capital resources, or special circumstances, multiples can be misleading.
• No consideration of individual characteristics: Multiples are based on averages and only partially account for individual value drivers.
• Legal contestability: Insufficient documentation or selection of comparable companies can lead to legal challenges in litigation.

Summary

Multiples hold significant importance in the legal field as a tool for valuation and plausibility checking. They are particularly used for company valuation, impairment tests, and in tax law as market- and comparison-oriented key figures. The use of multiples is subject to legal requirements regarding the selection, comparability, traceability, and documentation. Nonetheless, the limitations and risks of the valuation method must be observed in order to ensure a legally sound and recognized application.

Frequently Asked Questions

What legal framework must be considered when forming multiples?

Multiples, which are frequently used to value companies in the context of acquisitions, sales, or mergers, are subject to various legal frameworks. Notably, provisions from commercial and corporate law must be taken into account, such as those in the German Stock Corporation Act (AktG) concerning the valuation of company shares during transfers, mergers, or demergers. Tax regulations also play an essential role, since multiples may form the basis for tax valuations, for example in company valuations under the Reorganization Tax Act or when determining the tax base for inheritance and gift taxes. Contractual aspects must also be considered, especially in relation to agreeing and enforcing purchase price arrangements based on multiples. Finally, regulatory requirements—such as insider law, ad hoc disclosure obligations (§ 15 WpHG), and supervisory requirements (BaFin, ESMA)—require a transparent and traceable application of multiples during business valuations.

What liability risks exist when applying multiples in business valuation?

The use of multiples carries significant liability risks from a legal perspective, especially for appraisers, auditors, and consultants involved. Distorted or incorrect multiples—such as those based on incomplete or outdated data—can lead to faulty business valuations and trigger liability consequences. In company acquisitions, incorrect valuations could result in claims for damages, especially if purchasers suffer financial losses due to inaccurate assessments. Furthermore, intentional or grossly negligent misvaluation may have criminal relevance, for example in cases of fraud, breach of trust, or market abuse (§§ 263, 266 StGB; EU Market Abuse Regulation). For company officers, an erroneous valuation may also be relevant for liability (§§ 93 AktG, 43 GmbHG, Business Judgment Rule) if they are accused of having applied multiples improperly or failed to critically review them.

What documentation requirements are relevant in connection with multiples?

Documentation obligations play a central role in the use of multiples, especially to ensure transparency and traceability of valuation decisions. Under commercial and tax regulations (§ 238 HGB, § 140 AO), all relevant valuation assumptions, data sources, and calculation of multiples must be properly, comprehensibly, and verifiably documented. In capital market environments, there are additional due diligence and disclosure obligations, for example in offer documents for public takeovers (§ 10 ff. WpÜG) or during company valuations within IPOs (prospectus obligations under the EU Prospectus Regulation). In due diligence reviews, insufficient documentation may lead to liability and complicate the enforcement of rights in the context of M&A transactions.

To what extent are multiples recognized in court proceedings?

Courts generally accept multiples as a valid instrument for company valuation, but require particularly careful derivation and a critical assessment of the reference figures used. Especially in appraisal proceedings under § 1 SpruchG, where the appropriateness of compensation or settlement payments is examined, courts regularly require detailed justification of the valuation method and an explanation as to why and to what extent multiples are deemed appropriate in the specific case. They are usually accepted only as part of a comprehensive plausibility check (so-called cross-check), alongside other methods such as the discounted cash flow method. If sufficient legal and technical substantiation is lacking, valuation approaches based on multiples can be dismissed by courts.

What regulatory requirements apply when using multiples?

Regulatory requirements related to the use of multiples arise particularly in the financial services sector. Institutions carrying out valuations on this basis and operating in a regulated environment—such as financial service providers, intermediaries, or preparers of investment reports—must ensure compliance with regulations including the Securities Trading Act (WpHG), the Market Abuse Regulation (MAR), as well as further BaFin or ESMA guidelines. This especially includes requirements for preventing market manipulation and insider trading, as well as obligations for thorough and objective analysis (MiFID II). The documented valuation logic must be disclosed to supervisory authorities and justified in the event of an audit.

Must multiples be considered when valuing a company for tax purposes?

Multiples are fundamentally recognized as a supplementary tool in tax valuations, but are generally used only in conjunction with other methods. According to the Valuation Act, the tax authorities require that in company valuations for determining tax values (inheritance, gift, transformation), the fair market value is decisive; multiples can be used as a plausibility check but should not be exclusively decisive. During audits by tax authorities, valuation assumptions—especially regarding the type of multiple and the peer group used—must be documented in a traceable manner. Internationally, for example in transfer pricing according to the OECD Transfer Pricing Guidelines, multiples analysis is also quite common and subject to strict documentation and traceability requirements.

What role do multiples play in squeeze-out or takeover proceedings?

In squeeze-out proceedings (§§ 327a ff. AktG) and public takeovers (§ 31 WpÜG), multiples are recognized as a permissible valuation instrument, particularly for plausibility checks and for determining market value. However, reliance solely on multiples is legally controversial and is generally accepted only in combination with other methods, especially those conforming to IDW S1. Case law additionally requires that the selection and weighting of the multiples used be explicitly justified and matched to the company’s individual business model. In appraisal proceedings, all significant valuation methods must always be considered as a whole, with multiples often used to validate results from other methods.

How do national and international standards affect the use of multiples?

The application of multiples is influenced by various national and international valuation standards. In Germany, IDW Standard S1 provides binding guidelines for company valuations, under which multiples can be used as supplementary methods but should not constitute an independent primary method. Internationally, for example under the International Valuation Standards (IVS) or IFRS requirements, multiples are recognized as a market value method, provided they are appropriately evaluated and documented based on market data. In cross-border transactions, it is therefore always necessary to review which valuation conventions, legal requirements, and accounting standards must be observed to ensure legal recognition of the chosen method.