Taxation in business valuation is complex. It depends on the reason for the valuation, the legal form, the tax characteristics of the object (e.g. losses) and valuation method decisions such as the tax shield effect. This article systematizes the most important tax aspects in valuation and shows how smartZebra can support you in this area.
The value of a company is determined by the amount of cash inflows to the shareholder. These net inflows are to be determined taking into account the corporation's income taxes and, in principle, the personal income taxes of the shareholders. In the theory and practice of company valuation, as well as in case law, the necessity of taking personal income taxes into account is undisputed.
Due to the relevance of personal income taxes for the value, it is necessary to standardize the tax circumstances of the shareholders for the purpose of determining the objectified business value. In an objectified business valuation, a standardized tax rate is therefore used, even though the actual tax circumstances of the shareholders are known.
The standardization can be carried out directly, i.e. by explicitly determining the taxation effect at the company and shareholder level when calculating the cash flows and in the capitalization rate. In contrast, an indirect standardization is used when the personal taxes of the shareholders are not explicitly taken into account because the effect of taxation on the cash flow and on the capitalization rate is almost the same and can therefore be neglected.
Deferred taxes are hidden tax liabilities or tax advantages that arise due to differences in the recognition or valuation of assets or liabilities between the tax balance sheet and the commercial or IFRS balance sheet and that balance out in future fiscal years.
Income and expenses from the formation and dissolution of deferred taxes are of an accounting nature. It is worthwhile to determine the causes of the latencies and only then to define the form of consideration in the business valuation.
First of all, it is important to separate (active) temporary latencies from deferred taxes due to loss carryforwards. Loss carryforwards are usually valued separately. In the case of deferred tax assets and liabilities of a temporary nature, the valuer should analyze whether their origin is event-driven and rather random in nature, or whether surpluses on the assets or liabilities side are regularly generated and are rooted in the nature of the business model. Only then should the valuer determine how to deal with the issue in the valuation methodology.
Deferred and original tax claims and liabilities should be considered separately. The latter are more in the nature of working capital; there is no relationship to the level of the tax rate due to the typically existing advance income tax payments. By contrast, this relationship exists very directly for deferred taxes.
https://www.smart-zebra.de/post/deferred-taxes-in-business-valuation
Not all tax shields are the same. On the one hand, there is the specific tax advantage of debt financing through the (partial) deductibility of interest from the tax base. This can be described as the so-called cash flow effect.
The question that arises when applying a tax shield in the context of the beta factor calculation, however, is “How certain is the use of the tax advantage of debt financing?”
For the appraiser, it is important to distinguish between the cash flow effect and the risk effect of the tax shield. In combination, both effects define the amount of the often not insignificant value of the tax shield. A good understanding of the fundamentals of the tax shield is therefore quite relevant for the business valuation.
https://www.smart-zebra.de/post/the-tax-shield-in-business-valuationcure-vs-secure-tax-shield
There are rarely any blanket answers when it comes to taxes. Particularly when loss carryforwards and deferred taxes play a major role, it is worth taking a closer look at the topic. Regardless of this, the treatment of the shareholder's personal taxes must always be aligned with the reason for the valuation. smartZebra's expertise and tools can help navigate these complexities and ensure accurate and reliable business valuations.
We support you in researching the data — e.g. putting together the peer group — with a short training session on how to use the platform. We are happy to do this based on your specific project.
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