Valuation

Concept and Fundamentals of Valuation

Valuation (English for ‘assessment’ or ‘determination of value’) refers in a legal context to the proper and methodologically sound determination of the economic value of assets, companies, rights, or liabilities. It is of central importance, in particular, in the fields of commercial law, corporate law, tax law, insolvency law, as well as in the context of transactions. Valuation forms the basis for numerous legal decisions as well as tax or accounting requirements.

Definition of Valuation

In the legal sense, valuation is understood as a structured process in which, by applying economic and legally recognized methods, the value of an asset or a company is determined as of a specific reporting date. The concrete methodology of valuation varies according to the purpose of the valuation and applicable law, whereby transparency, traceability, and objectivity must always be sought.

Application of Valuation in Law

Corporate Law

In corporate law, valuation plays a central role – for instance, during company formations, capital measures, mergers, as well as the entry and exit of shareholders. For accurate valuation, the following methods are particularly applied:

• Income Approach (Ertragswertverfahren): Crucial in the valuation of companies within the framework of the Transformation Act (UmwG) and the Transformation Tax Act (UmwStG).
• Net Asset Value Method (Substanzwertverfahren): Used in the valuation of companies or asset pools, for instance to determine the shareholder’s compensation under the German Commercial Code (HGB) or the Limited Liability Companies Act (GmbHG).
• Discounted Cash Flow Method (DCF): Frequently used according to international and German valuation standards.

Compensation and Valuation in Corporate Law

The German Stock Corporation Act (AktG) and the Limited Liability Companies Act (GmbHG) prescribe valuation rules and mandatory payouts especially in the case of exclusion of minority shareholders (squeeze-out, § 327a AktG) or upon a shareholder’s exit. The amount of compensation is set based on recognized valuation methods and is subject to judicial review.

Tax Law

Valuation for tax purposes entails special requirements. The valuation rules mainly derive from the Valuation Act (BewG) and associated administrative guidelines. Valuation forms the tax basis for inheritance tax, gift tax, or property tax.

• Valuation of Real Estate: According to the Valuation Act – in particular §§ 182 ff. BewG.
• Business Valuation: Pursuant to §§ 203 ff. BewG for tax purposes.
• Valuation of Other Assets: Such as shareholdings, stocks, rights, or receivables.

The Valuation Act provides detailed valuation criteria for fair value, partial value, or book value.

Insolvency Law

In insolvency law, proper valuation is essential for creditor satisfaction. The value of the debtor’s assets is crucial for calculating the insolvency estate (§ 35 InsO) and determining the insolvency quota. Items to be valued include, among others, security interests, business interests, or intangible assets (e.g., trademark rights). The insolvency court may appoint experts to determine value.

Within the scope of debtor-in-possession proceedings and the insolvency plan (§ 217 ff. InsO), valuation is mandatory for the purposes of comparative calculations (comparison between standard and planned insolvency).

Valuation Occasions and Valuation Objects in Law

M&A Transactions

During business acquisitions and sales, valuation provides an objective basis for price determination, due diligence, and contract structuring. In the purchase agreement, valuation methods are used to specify price formulas and guarantees.

Valuation of Intangible Assets

Rights such as patents, trademarks, and licenses are subject to their own valuation rules, particularly under the Copyright Act (UrhG) or trademark law. Methods such as the royalty analogy method or discounted cash flow analysis are used here.

Valuation in Family and Inheritance Law

In the context of marital property equalization procedures (BGB), estate settlements, and compulsory share claims, assets must be valued at their market value. Relevant regulations can be found in the German Civil Code, especially regarding valuation criteria for business interests or real estate.

Methodology and Standards of Valuation

Valuation Principles

Legal valuation is based on the principles of traceability, freedom from arbitrariness, and transparency. Valuation standards such as the IDW Standard S1 (Institute of Public Auditors in Germany) contribute to the harmonization and auditability of valuation. For tax valuation, the Valuation Act is decisive.

Selection of the Valuation Method

The choice of the appropriate valuation method depends on the purpose of the valuation, the nature of the valuation object, and the legal requirements. Classic methods are:

• Income Approach
• Discounted Cash Flow Method
• Net Asset Value Method
• Multiples Method (for business sales)
• Market Value Method (for real estate)

Documentation and Evidence of Valuation

Each valuation should be documented in a comprehensible report. This must contain the methodology, calculation bases, valuation date, as well as a detailed justification. Especially in the context of judicial review or tax audit, complete documentation is indispensable.

Judicial Review and Challenge of Valuation

Valuations are regularly the subject of judicial reviews, particularly in connection with compensations, business transformations, or contentious disputes. The court examines the methodology, appropriateness, and compliance with legal requirements. In many cases, an independent expert may be commissioned to prepare a separate valuation.

Legal Remedies and Legal Consequences

Incorrect valuations can be challenged in court. Possible legal consequences include adjustments to compensation, reduction or increase of tax assessments, or the modification of insolvency plans. Often, the initiation of appraisal proceedings (e.g., under the Appraisal Proceedings Act – SpruchG) is required.

Importance of Valuation in the International Context

With the increasing internationalization of economic transactions, international valuation standards (e.g., International Valuation Standards – IVS, International Financial Reporting Standards – IFRS) are gaining in importance. In cross-border transactions, coordination of the different national valuation standards is regularly required, especially to avoid double taxation and valuation divergences.

Literature and Further Legal Sources

• Valuation Act (BewG)
• Stock Corporation Act (AktG)
• Limited Liability Companies Act (GmbHG)
• Transformation Act (UmwG)
• Insolvency Code (InsO)
• Institute of Public Auditors in Germany: IDW Standards
• Appraisal Proceedings Act (SpruchG)
• International Valuation Standards (IVS)

This comprehensive overview demonstrates that valuation is a complex legal concept encompassing various areas of business and private law as well as international regulatory frameworks. The application and performance of a proper valuation are crucial for the legally secure treatment of numerous matters.

Frequently Asked Questions

What legal foundations must be considered in business valuation in Germany?

Business valuation in Germany is characterized by various legal frameworks. Central to this is the German Civil Code (BGB), especially regarding the valuation of company shares in disputes between shareholders or in cases of inheritance (§§ 738, 752 BGB). The Transformation Act (UmwG) and the Stock Corporation Act (AktG) also play a central role in valuations carried out in the context of mergers, demergers, and squeeze-out proceedings. The Valuation Act (BewG) sets forth specific provisions for tax valuations, particularly for inheritance and gift taxes. Additionally, commercial law provisions (e.g., § 253 HGB for the valuation of participations in the balance sheet) as well as specific regulations and standards such as the IDW S 1 of the Institute of Public Auditors, which summarizes recognized principles for conducting business valuations and is frequently referenced in a judicial context, also apply.

In which court proceedings does a business valuation play a role?

Business valuations are relevant in a multitude of court proceedings. They are most commonly applied in appraisal proceedings under the AktG, for example, when minority shareholders wish to have the adequacy of the offered compensation reviewed following a squeeze-out or in the case of domination and profit transfer agreements. Likewise, valuations are of central importance in disputes between shareholders in partnerships or corporations (e.g., in the case of a shareholder’s exit or the dissolution of the company). In estate settlements, business value is used to determine the share of the inheritance. Moreover, business valuations are regularly required during family law disputes (especially in the context of marital property equalization) or in insolvency proceedings (e.g., to determine the insolvency estate and in cases of transferred restructuring).

What legal requirements exist for experts in business valuation?

Experts in the context of business valuations are subject to general civil law as well as specific professional regulations. They must act independently and impartially, which is regulated for court-appointed experts in particular by § 407 of the Code of Civil Procedure (ZPO). The selection is often made by the courts, with preference given to publicly appointed and sworn experts. Qualification requirements are derived from professional regulations (e.g., the Public Accountants Act) as well as from professional standards such as IDW S 1 or the principles of the Institute of Sworn Appraisers for Valuation (IfB). If an expert violates minimum requirements regarding objectivity or expertise, this can lead to rejection of their report or the appointment of a new expert. In cases of gross violation of duties, liability for damages may also arise.

What significance do valuation standards have and how are they classified legally?

Valuation standards such as IDW Standard S 1 do not have the force of law in Germany but are regularly used by courts as the ‘recognized principles of business valuation.’ They thus represent generally accepted rules of valuation practice and are binding in particular for auditors and experts. Courts refer to these standards to review the traceability, appropriateness, and quality of an expert opinion. In legal disputes, e.g., in appraisal proceedings, valuation procedures that comply with IDW S 1 are recognized as appropriate. However, parties may agree on different valuation methods in individual cases, provided these do not violate mandatory legal provisions and are properly substantiated.

How is the right to information in business valuation regulated by law?

Access to complete and accurate information is crucial for business valuation. Legally, comprehensive disclosure and submission obligations of the management exist, especially in appraisal proceedings (§§ 327b ff. AktG) and in valuations in connection with compensation arrangements, both to the expert and, if applicable, to affected minority shareholders. Management is obliged to provide all documents relevant to the valuation, such as annual financial statements, business reports, or contracts. If they fail to comply with this obligation, the court may impose coercive measures or conduct the valuation based on the information available, which regularly disadvantages the party refusing disclosure. Data protection also plays an important role in the transfer and storage of sensitive company data in the valuation context and must comply with the provisions of the GDPR.

What liability risks arise in connection with business valuations?

Experts, auditors, and others involved in business valuation are subject to certain liability risks. If they produce a flawed report based on deficient data, methodological errors, or lack of due care, they can be held liable both under contractual and statutory provisions (e.g., § 280 BGB). Court-appointed experts are liable to the parties of the proceeding. Claims for damages may arise if a financial loss can be proved to have resulted from a faulty report. In addition, auditors and tax advisors working in the field of valuations may also be held accountable for breaches of duty under professional law (e.g., § 323 HGB, § 64 StBerG). Professional liability insurance is therefore essential for these professional groups.

Are there special rules for business valuation in the context of tax valuations?

For tax purposes, the Valuation Act (BewG) is of central importance. It regulates the valuation methods, especially for determining the fair value in the taxation of business transfers, inheritances, and gifts. Tax valuation is fundamentally formalized and may deviate from civil or commercial valuation. Within the framework of the Inheritance and Gift Tax Act (ErbStG), various methods – such as the simplified income approach (§§ 199, 203 BewG) – are mandatory. The tax authorities are bound by these regulations, even if the actual market values differ. However, affected parties have, under certain circumstances, the right to prove a lower fair value through a qualified valuation report. There are also special tax regulations for business split-ups or restructurings that must be taken into account during valuation.