How does Venture Capital company valuation work in Germany?

If you deal with the valuation of startups, you will often come across the term venture capital valuation. What it's all about, how it works in german practice, and whether this method is suitable for valuing your company is what we'll shed light on for you in this article.

The 101 of methods for business valuation under german law

Various approaches and methods can be found for business valuation in german practice and theory. Accordingly, the value of the company can vary greatly between different methods, which is why choosing the right valuation method is already crucial in german business valuation. The 101 of valuation methods in Germany include:

1. Classical capitalized earnings value method IDW S1
2. Discounted cash flow (DCF) method
3. Simplified capitalized earnings value method
4. EBIT and sales multiples method
5. Net asset value method
6. Stuttgart method

Special case: The valuation of a start-up in Germany

When it comes to the valuation of startups, this is a special case in the field of german business valuation. This is because, especially in the early days, young companies are often not yet able to prove sales, which is why the valuation is particularly dependent on forecasts and estimates. Nevertheless, shares in a start-up regularly achieve a very high value with investors, without this being able to be proven on the basis of current figures.

In german consulting practice, the discounted cash flow method, the multiplier valuation and the IDW S1 method are generally relevant for the valuation of startups. Recently, however, the venture capital method has also gained importance in this context.

The basics of the Venture Capital method in german practice

The venture capital method (VC method) is used to determine the enterprise value of a startup even before investors have stepped in. The basis for the calculation is the liquidity result at the planned exit from the perspective of the investor.

In the sense of the procedure, the value of the company is calculated back from the planned exit proceeds at the time of sale or IPO and the return expected by the investor between entry and sale. Depending on the risk assessment, a return of between 25% and 100% can be expected.

The Venture Capital procedure in german company valuation

At the beginning of the procedure, the expected exit proceeds are determined. The foundation of the calculation is the business plan including the key figures to be determined such as sales, EBIT, EBITDA, in order to create the basis for the use of the so-called multiples method. Once a key figure has been selected (e.g. EBIT), it is multiplied at the expected time of the sale (e.g. in 6 to 8 years) by an industry and transaction multiplier customary for the company to be valued and the expected proceeds are calculated.

Using a compound interest calculation, the future value of the investor's investment can then also be determined on the basis of its expected return. In order to calculate the amount of the investor's participation, the future value of the investment is divided by the determined future company value.

Pro & Con Venture Capital Method in Germany

Venture capital methods are becoming increasingly popular in german practice due to their ease of use and the cost savings that often accompany them. However, the calculation of the company value is carried out in a very generalized and simplified manner. Company-specific characteristics of the valuation object are regularly not taken into account.

Therefore, if you want to be on the safe side and avoid a potentially incorrect valuation, you should prefer a company valuation oriented to the individual case in accordance with the regulations of IDW S 1, since both objectified values and subjective company values are determined and financing structures or return requirements of investors are also taken into account.

If you require legal advice in connection with business valuations in Germany, the lawyers of ROSE & PARTNER, in particular our certififed specialists for german corporate law, will be pleased to assist you. You will find further information on our website: https://www.rosepartner.de/en/lawfirm-germany/startup-company-valuation.html