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  • Valuation

Valuation

‘Evaluating means comparing.’ (Adolf Moxter)

The question of what value an asset has is posed on numerous and very different occasions in business and corporate practice. Whether you are looking at a transaction or restructuring, a valuation is almost always necessary – either to actually be able to complete the transaction or at least forecast the consequences (including the tax-related effects).

BDO supports you in your valuation tasks by providing an interdisciplinary team of experienced staff to collaborate with you. Our experts know your industry’s business models at home and abroad and collaborate closely with colleagues in other departments to jointly find an efficient solution for you.

 

Business valuation in the scope of a transaction

One of the key questions in any transaction – be it a purchase, a sale, a share transfer among shareholders, a merger of companies and parts of companies or a stock market listing – is the question of the fair value, or what price should be paid at a maximum or asked at a minimum. This is regardless of whether the stakeholders are third parties or related. Our experts help you to answer all questions relating to the value of assets as consultants, neutral experts or arbitrators.

The decisive factor in pricing is achieving clarity in terms of what factors are actually relevant to value, and the extent to which they affect the price. The basis of any (business) valuation is therefore a prospective analysis of the asset being valued. The scope of the analysis depends on the reason for the valuation and the environment, such as access to information and the time frame. The reviewer also has to identify synergies and take into account off-balance sheet assets such as customer bases, brands and technologies in an appropriate way. Occasionally there is also the question of non-core assets, to which a special value is then assigned in the context of company valuation.

The company valuation itself is then also dependent on various methods (e.g. based on the IDW specifications or International Valuation Standards). Future cash flows are discounted at an appropriate discount rate. The results are then projected against the current market forecast on the basis of multiples. In some cases, special decision-oriented methods such as the real options approach, or methods for valuing stock options, are applied.

 

Consultancy and valuation against the background of corporate law

Companies also always face questions of corporate and tax law that necessitate a valuation. Examples include squeeze-outs of minority shareholders, delisting or changes in the corporate structure. Particular challenges include substantive and methodological requirements of legislature and detailed specifications of the courts with respect to the intended approach and in determining the transaction value.

Our service is not limited to valuation only; we are also there to support you throughout the process. This starts with assistance in preparing and organising the actions and continues through to communication with the auditor or court-appointed auditor, preparing and conducting meetings, registration and any downstream processes.

The experts at BDO support enterprises worldwide in implementing actions with state-of-the-art, interdisciplinary expertise. We collaborate closely with commissioned lawyers and offer you service from a single source on request.

 

Fairness opinion

CEOs and managing directors are increasingly subject to liability risks if they fail to prove that they ‘act for the benefit of the company based on adequate information’.

One instrument for avoiding liability risks and underpinning important decisions, for example, in the context of transactions is an appraisal of the appropriateness, or ‘fairness opinion’ by an independent third party. Auditors or investment banks usually draft these opinions. In detail, it is typically a matter of investigating an agreed or currently negotiated transaction price for financial appropriateness.

The applications of a fairness opinion in the transaction environment are diverse. It makes sense for purchases and sales of companies, parts of companies or other major assets. It can be relevant in all business decisions that have a significant impact on the financial position and performance of an enterprise, and it also contributes toward reducing the information gap between the board and the investors. One important application of a fairness opinion is a legally required opinion by the management board and supervisory board in case of an offer pursuant to §27 of the Wertpapiererwerbs- und Übernahmegesetzes (WpÜG) (German securities acquisition and takeover act).

A fairness opinion regularly consists of an opinion letter and a valuation memorandum. The valuation memorandum supplements and adds detail to the reporting in the opinion letter. In addition, the recipient can be provided with a factual memorandum. In preparing the fairness opinion, strict requirements are imposed on the independence and objectivity of the provider. Several methods are always applied when assessing the appropriateness of a value. In Germany, the net present value method follows IDW S 1; transaction and trading multiples are evaluated parallel to this. In addition, publicly available information, such as analyst reports and takeover premiums in comparable cases are considered. The result is a bandwidth within which the transaction price can be deemed appropriate.

 

Purchase price allocation

After the acquisition of a company, the acquisition price paid needs to be broken down, from an accounting point of view, into the identifiable assets and liabilities in the scope of the consolidated balance sheet. This results in a positive (goodwill) or negative delta on the acquisition date. Purchase price allocation (PPA) must be carried out independently of the applicable accounting standard; however, the requirements differ in terms of details.

In particular, the value of the newly identified intangible assets and – in the case of HGB – goodwill has an immediate impact on the earnings a company shows due to the depreciation potential. The implementation of a PPA therefore requires great experience, professional expertise and, not least, significant resources. BDO supports you in the efficient implementation of the PPA. In the pre-PPA, in advance of your acquisition, we can show you how your financial figures will change and where there are opportunities for optimisation. Our approach also helps to substantially reduce the risk of future depreciation of intangible assets (impairment). 

In the scope of analysing a transaction, the first step is to determine the purchase price and date of acquisition relevant for the PPA. We analyse the transaction in detail (including earn-out clauses as well as buying and selling rights) and determine the transaction price, taking into account the relevant provisions.

In a second step, the previously off-balance sheet intangible assets and liabilities are identified by the criteria set by the applicable accounting standards, as they will be shown in the future consolidated balance sheet.

Then, the fair value is determined for all assets and liabilities, whether on or off the balance sheet. The pertinent evaluation standards (e.g. IDW S 5 for intangible assets) need to be taken into account here, as must the impact on the group’s tax planning (deferred taxes). We support you here with an experienced team of specialists and tax experts in the evaluation of brands, technologies and customer relationships. BDO also has strong technical expertise, in the form of our subsidiary BDO TUC.

Finally, the delta between the purchase price and the fair value of the net assets is determined. If it is a positive amount, it is treated as goodwill, which then needs be distributed across the cash-flow-generating units (CGUs) of the group. If a negative difference is determined, it may be necessary to post this against earnings to increase profits.

We provide a detailed and easily comprehensible report on the valuations and the effect on intangible assets and goodwill resulting from them. We handle the required coordination with your auditors in good time to allow for a trouble-free audit process. On request, we also support you in providing the information that you need to meet the extensive disclosure requirements related to a PPA. We are familiar with both the minimum requirements and best practices.

 

Evaluation of intangible assets

The focus has increasingly turned to intangible assets in recent years – not least due to the increased importance of IFRS in accounting practice. In some cases, intangible assets can account for a high proportion of the value of the company, which is why increased attention is paid to their valuation, particularly in the scope of transactions. In addition to valuation in the context of selling individual intangible assets, accounting rules such as purchase price allocation following an acquisition, but also tax regulations and internal corporate controlling, require the valuation of intangible assets in particular. BDO supports you here by creating valuations based on the valuation standard Grundsätze zur Bewertung von immateriellen Vermögenswerten (IDW S 5) (Principles for the valuation of intangible assets).

Intangible assets – that is, goods that are used in the service creation process, but that have no physical substance – can fundamentally assigned to the following categories (cf. IDW S 5):

  • Marketing-related intangible assets, such as trademarks and Internet domain names, are primarily used for selling and marketing products and services.

  • Customer-oriented intangible assets, such as customer lists or order balances.

  • Intangible assets based on other beneficial contracts or rights, such as licences, leases, franchise agreements, broadcasting and television rights, etc.

  • Technology-based intangible assets, such as patented and unpatented technologies or software.

  • Art-related intangible assets can include rights for: music tracks, images, photographs, videos and TV programmes.

In terms of the valuation approach, three evaluation methods are distinguished:

Observable market prices for sufficiently comparable assets are referenced in the market price method. The prerequisite here is an active market for the asset being valued. As this is not available for most intangible assets, it may be possible to use comparable transactions for value determination (analogy method).

In the case of the net present value method, the value results from future earnings that will be generated by the intangible asset. Within the net present value method, different methods are distinguished depending on the derivation of the cash flows relevant to the valuation and the importance of the asset to the company.

In contrast to this, the cost method focuses on the costs that are necessary to make a duplicate of the intangible asset (reproduction costs method) or the cost of the production or procurement of an asset with a similar business value (replacement cost method).­ In this case, deductions may be made to account for depreciation of the asset being valued.

Which method to use depends in each individual case on the motivation for the valuation (e.g. decision-making, agreement or liquidation value) and the existing information basis.­

 

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