Calculating the value of an inheritance - calculating the value of a company
If a decedent leaves several heirs, they form a community of heirs. The aim of this community of heirs is to divide the estate, calculated on the basis of the respective inheritance quota left, among the heirs and thereby dissolve the community of heirs. For this purpose, all estate values must first be determined. This undertaking becomes difficult if the decedent owned a business.
It is clear that there is no fixed value for the company per se. Rather, the assessment of the value of a company depends on many different factors, in particular the valuation method.
What are the legal requirements for business valuation?
Courts often reach their limits when it comes to calculating a company's value for the compulsory portion or the inheritance quota. The reason for this is that the law provides only extremely few specifications in this regard.
Section 2311 (1) of the German Civil Code (BGB) merely stipulates in this context that the calculation of the compulsory portion is based on the existence and value of the estate at the time of inheritance. Pursuant to paragraph 2, the value is to be determined by appraisal.
With regard to assessing the value of a business, this standard is of relatively little help due to the many different factors that must be taken into account when valuing a business.
What are the calculation methods?
Courts often use appraisers for the valuation of the company. These in turn make use of various valuation methods.
Capitalized earnings value method
A common valuation method that is frequently used in practice is the capitalized earnings value method. Here, the value of a company is derived solely from its expected future earnings. In the capitalized earnings value method, the value of the company is essentially determined by the financial surpluses that can be generated after the company has been continued as a going concern.
Another method accepted in practice is the multiplier method. Here, the enterprise value is determined by multiplying the sustainably achievable profit after deduction of trade taxes and management salaries by a factor X. In practice, the factor is in the range of the financial surpluses that can be achieved after the continuation of the business. In practice, the factor is usually between 5 and 8.
However, it is important to emphasize that these valuation methods only lead to a rather rough result. Nevertheless, they are most frequently used in practice due to the time and cost savings.
When using the capitalized earnings value method in particular, it should be noted that there are countless factors that can influence the value of a company, either upwards or downwards.
Especially in the case of small and medium-sized companies, the importance of the entrepreneur himself should not be underestimated.
The death of the sole owner, managing director, investor, risk taker and customer acquirer can drastically reduce the value of the company within a very short period of time. It is therefore imperative to take such personal factors into account when valuing the company.