Taxation in business valuation is complex. It depends on the reason for the valuation, the legal form, the tax characteristics of the property (e.g. losses) and valuation method decisions such as the tax shield effect.
Taxation in business valuation is complex. It depends on the reason for the valuation, the legal form, the tax characteristics of the property (e.g. losses) and valuation method decisions such as the tax shield effect. This article systematizes the most important tax aspects in the valuation and shows how smartZebra can provide support in this area.
The value of a company is determined by the amount of cash inflows to the shareholder. These net cash inflows must be determined taking into account the income taxes of the company and, in principle, the personal income taxes of the company owners. In the theory and practice of business 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 to the value, the tax situation of the shareholders must be standardized on a case-by-case basis in order to determine the objectified business value. An objectified business valuation therefore uses a standardized tax rate, although the actual tax situation of the shareholders is known.
The standardization can take place directly, i.e. by explicitly defining the taxation effect at the level of the company and the shareholders when determining the cash surpluses and the capitalization interest rate. Indirect standardization, on the other hand, is when the shareholders' personal taxes are not explicitly taken into account because the effect of taxation on the cash surplus and the capitalization interest rate is almost identical and therefore negligible.
Deferred taxes are hidden tax liabilities or tax benefits that arise due to differences in the recognition or measurement of assets or liabilities between the tax balance sheet and the commercial or IFRS balance sheet and that will be offset in future financial years.
Income and expenses from the recognition and reversal of deferred taxes are of an accounting nature. It is worth investigating the causes of the deferred taxes and only then determining the form of consideration in the business valuation.
Firstly, it is important to separate (deferred) tax assets from deferred tax liabilities due to loss carryforwards. Loss carryforwards are usually measured separately. In the case of deferred tax assets and liabilities of a temporary nature, the valuer should analyze whether the occurrence is event-driven and of a more random nature or whether surpluses are regularly generated on the assets or liabilities side and are due to 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 assets and liabilities should be considered separately. The latter have more the character of working capital; there is no relationship to the amount of the tax rate due to the typically existing income tax prepayments. In the case of deferred taxes, however, this relationship is very direct.
https://www.smart-zebra.de/post/deferred-taxes-in-business-valuation
Not all tax shield effects 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 referred to as the cash flow effect.
The question behind the application of a tax shield as part of the beta factors calculation, on the other hand, is "How safe is the use of the tax advantage of debt financing?".
It is important for the valuer 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 basics of the tax shield is therefore highly relevant for the business valuation.
https://www.smart-zebra.de/post/insecure-vs-secure-tax-shield
There are rarely blanket answers when it comes to taxes. Especially 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 tailored to the valuation occasion. 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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