3 questions to smart minds
Photo: Christian Zwirner

Company valuations in times of low interest rates

For this 3 questions to Prof. Dr. Christian Zwirner

Dr. Klee­berg & Part­ner GmbH WPG StBG
Photo: Chris­tian Zwirner
11. Novem­ber 2015

Valua­tion issues are among the most diffi­cult busi­ness manage­ment issues that compa­nies and their consul­tants have to deal with in their daily prac­tice. The valua­tion occa­si­ons and also valua­tion objects can be very diffe­rent. In short, every evalua­tion is diffe­rent! Since a company valua­tion some­ti­mes invol­ves funda­men­tal decis­i­ons of a long-term and stra­te­gic nature, the pitfalls of a company valua­tion must always be present. A major chall­enge for company valua­tions at present is the prolon­ged period of low inte­rest rates.

For this 3 ques­ti­ons to Mana­ging Direc­tor of Dr. Klee­berg & Part­ner GmbH WPG StBG in Munich

1. How do you assess the importance of busi­ness valua­tions for compa­nies in Germany and in your daily prac­tice as a consultant?

For some time now, the importance of company valua­tions has been incre­asing in prac­tice. This increase is due not least to the fact that valua­tion occa­si­ons have increased signi­fi­cantly in the past. This applies both to volun­t­ary company valua­tions for the purpose of poten­tial take­overs and to valua­tions that are manda­tory due to obli­ga­ti­ons under company law or due to dispu­tes under family or inhe­ri­tance law. This deve­lo­p­ment will conti­nue in the future. In this context, for exam­ple. the upco­ming inhe­ri­tance tax reform will lead to a signi­fi­cant increase in the number of busi­ness valua­tions, partly because the exis­ting exemp­tion opti­ons for busi­ness assets will undergo a serious adjus­t­ment. Where in the past no valua­tion of exis­ting assets was neces­sary for inhe­ri­tance tax purpo­ses due to the statu­tory provi­si­ons of the ErbStG, in future there will be no way around a busi­ness valua­tion in many cases. 

In our daily prac­tice, howe­ver, we are alre­ady obser­ving an increased willing­ness on the part of compa­nies and entre­pre­neurs to take advan­tage of the bene­fits of a company valua­tion, for exam­ple. for the purpose of secu­ring a purchase price for them­sel­ves — not least against the back­ground of incre­asing compli­ance and corpo­rate gover­nance requirements.

2. What chal­lenges do you regu­larly face as a consul­tant in the context of busi­ness valuations?

The chal­lenges encoun­te­red as a consul­tant in the context of busi­ness valua­tions vary greatly depen­ding on the valua­tion occa­sion or valua­tion object. As a rule, howe­ver, the consul­tant will be faced with the task of deter­mi­ning the value of the future (expec­ted) payment surplu­ses of the valua­tion object at the time of the valua­tion date. This task is accom­pa­nied by the deter­mi­na­tion of a large number of para­me­ters, some of which are subject to considera­ble uncer­tainty. These include, for exam­ple. the effects of the legal form of the valua­tion object, the owner­ship struc­ture, the market and compe­ti­tive envi­ron­ment, the influence of tax circum­s­tances and other company-speci­fic features as well as legal chan­ges in the busi­ness environment. 

In addi­tion to the correct deter­mi­na­tion of future finan­cial surplu­ses, the deter­mi­na­tion of an appro­priate capi­ta­liza­tion rate is regu­larly a diffi­cult task. With regard to the capi­ta­liza­tion rate, even small chan­ges in its level lead to a large change in the enter­prise value. When deter­mi­ning the inte­rest rate, the consul­tant must ther­e­fore take great care to keep all influen­cing factors in mind. 

At present, compa­nies and their consul­tants are also preoc­cu­p­ied with the persis­t­ently low level of inte­rest rates. The base inte­rest rate rele­vant for busi­ness valua­tion purpo­ses has been at a histo­ric low for a long time. The low level of inte­rest rates often ensu­res that corpo­rate assets and invest­ments are highly valued on compa­nies’ balance sheets without any discer­ni­ble addi­tio­nal earnings poten­tial having been generated.

3. How should we assess the impact of low inte­rest rates on corpo­rate values?

The current low-inte­rest phase is curr­ently affec­ting almost all compa­nies across all indus­tries and regard­less of company size. For compa­nies that use e.g. have to perform an annual impair­ment test under IFRS due to exis­ting good­will, the low inte­rest rate means that the company’s assets may be valued higher than they actually are based on their actual net assets, finan­cial posi­tion and results of opera­ti­ons. The danger of the forma­tion of a so-called good­will bubble is great. 

In gene­ral, it can be assu­med that a large number of compa­nies tend to be overva­lued due to the low level of inte­rest rates. It is not yet possi­ble to assess what the conse­quen­ces will be in indi­vi­dual cases if inte­rest rates rise again. Another problem is that the possi­bi­li­ties of influen­cing the inte­rest rate are very limi­ted. Moreo­ver, it is uncer­tain when the inte­rest rate trend will reverse again. It is ther­e­fore important for compa­nies to keep an eye on the effects of the low inte­rest rate and to initiate measu­res at an early stage to coun­ter­act poten­tial risks in good time.



About Prof. Dr. Chris­tian Zwirner

Prof. Dr. Chris­tian Zwir­ner is Mana­ging Direc­tor of Dr. Klee­berg & Part­ner GmbH WPG StBG in Munich. He focu­ses on issues of busi­ness valua­tion. To this end, he publishes regu­larly. Prof. Dr. Zwir­ner is also the editor of the Hand­book of Busi­ness Valua­tion and contri­bu­tes his exper­tise to various profes­sio­nal bodies.

About Dr. Klee­berg & Part­ner GmbH

Klee­berg, based in Munich and Hamburg, advi­ses natio­nal and inter­na­tio­nal clients compre­hen­si­vely on tax and busi­ness manage­ment issues as well as on all issues in the field of audi­ting. Our highly quali­fied employees are profi­ci­ent in the full range of consul­ting services in the areas of tax consul­ting, audi­ting, busi­ness consul­ting, inter­na­tio­nal support and corpo­rate finance. Klee­berg is also a member of Crowe Horwath Inter­na­tio­nal and, in its Advi­sory divi­sion, specia­li­zes, among other things, in corpo­rate valua­tion issues. 

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