Valuation services
Due diligence
The high number of failed acquisitions and mergers are clear proof that mergers and acquisitions transactions are a risky business.
Excessively optimistic planning figures, previously unknown risks in financial statements, cultural differences or quality defects are just a few of the causes. They frequently go unrecognised before completion of the transaction. In addition, the seller enjoys a considerable advantage over the buyer in terms of information due to their much more detailed knowledge of the company. Also, the company to be purchased is often “smartened up” before a sale. Strengths and opportunities are particularly emphasised and weaknesses and threats are correspondingly concealed.
To counteract these problems the buyer carries out a due diligence investigation, which is a review of the true state of the company to be taken over. It looks into the actual extent of strengths and opportunities and whether there are any previously unknown weaknesses and threats. It encompasses the financial statements and planning figures (financial due diligence), taxation factors (tax due diligence) and the legal situation (legal due diligence), as well as corporate culture (cultural due diligence) and environmental risks (environmental due diligence).
Besides providing support in making a decision for or against an acquisition, due diligence also supplies arguments which can be used to reduce or determine the purchase price.
Our due diligence investigations mainly focus on financial due diligence, i.e., an assessment of past, current and forecast figures such as balance sheets, profit and loss statements and cash flows, but also employee structure, orders in hand and customer structure.
We work with experienced partners to carry out tax, legal, environmental and cultural due diligence.We work with experienced partners to carry out tax, legal, environmental and cultural due diligence.
Transaction-related business valuation
“50% of all mergers make sense.” This expression has been confirmed many times in the past. You assess whether an intended acquisition makes sense from a strategic perspective. We help you decide whether it will succeed from a financial perspective.
For the acquisition of a company or minority share, we help you review the plausibility of the business plans provided and assist in identifying and quantifying synergies.
We value the acquisition target using methods tailored to the company’s situation, like discounted cash flow, multiples or combinations and take into account real options, scenarios and exit strategies.
On request, we break the business value down into risk clusters, such as existing customer contracts, planned new business and goodwill. As part of a pre-deal purchase price allocation, we analyse the impacts of an acquisition on your profit and loss statement and balance sheet ratios.
For company disposals, we advise you on finding the appropriate timing for a sale. We work out the lowest acceptable price from your perspective and help you to estimate the highest price potential buyers would accept. Alternatively, we can provide a business valuation as an independent expert.
Fairness opinions
The model for valuing a company depends on the purpose of the valuation. We determine the fair value of a company.
In the course of preparing a fairness opinion or objective business valuation, the value of the company in its present condition has to be determined. Reasons for preparing such a valuation can be, for example:
- Acquisition or exit of a shareholder
- A squeeze -out process pursuant to §327a-f AktG
- A profit and loss transfer or control agreement pursuant to §291 AktG
- A management buy-out
- Independent valuation in connection with a company acquisition (2nd opinion)
- For accounting purposes
When preparing fairness opinions, we use the common standards of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer - IDW) or the German Association for Financial Analysis and Asset Management (Deutsche Vereinigung für Finanzanalyse und Asset Management GmbH – DVFA).
Impairment test
According to the generally accepted accounting principles of HGB, IAS / IFRS and US GAAP, goodwill resulting from an acquisition must be tested for impairment at least once a year.
SSimply put, an impairment test requires a business valuation with a subsequent breakdown of the business value into its different reporting units (US GAAP) or cash-generating units (IAS / IFRS). If the business value is lower than the carrying amount of the reporting unit, impairment losses must first be recognised on goodwill, and then, if necessary on further assets. This often results in a need to communicate with investors accordingly.
Depending on the structure of the reporting company, performing an impairment test can be time-consuming and complex. Undeniably, impairment tests allow for extensive use of discretion. We advise and support you in designing and carrying out the test.
In addition to impairment tests for goodwill or other assets, FAS AG can also do the following:
- Help to make the valuation process efficient by setting up forms and procedures and ensuring the valuation is carried out consistently year by year
- Provide independent valuations and second opinions to meet the requirements of the management, auditors and audit committee.
- Harmonise the preparation of the impairment test with your internal control systems or value-based control systems.
- Set up efficient impairment controlling with early warning systems.
Purchase price allocation
The acquisition of a company entails a requirement to perform a purchase price allocation under the accounting standards commonly used in Germany (IAS / IFRS, HGB, US GAAP).
A purchase price allocation involves valuing all assets and liabilities of a company at fair value.
When valuing assets already recognised at the acquisition object, such as land, machines or inventories, actually observable market values are used, such as standard land values or selling prices for inventories.
A much more significant impact is made on the balance sheet of the acquired company, however, by intangible assets which are only recognised as part of a purchase price allocation.
Customer relationships, trademarks and technology, for example, must be valued and recognised in the balance sheet.
Due to a lack of comparable transactions, discounted cash flow models that are accepted valuation practice are used.
In light of the substantial freedom of scope entailed, the valuation of intangible assets is particularly critically analysed by the Financial Reporting Enforcement Panel (FREP). The “balance-sheet police” have found this to be a hotspot for errors in the past.
Especially if the result of a purchase price allocation is not goodwill, but rather negative goodwill (lucky buy) recognised in profit and loss, critical questions can be expected from the auditors or the FREP.
Under the international standards, the following intangible assets in particular can arise, which must be valued:
- In relation to marketing – brands and names, domain names, non-competition clauses, etc.
- In relation to customers – customer lists, orders in hand, customer contracts, etc.
- In relation to legal matters – licences, supply and service contracts, rental contracts, broadcasting rights, employment contracts, etc.
- In relation to technology – patents, computer software, databases, formulas, etc.
Before, during and after a transaction, we can offer you the following services:
- Analysis of the effects of the various transaction structures on your future results (pre-deal PPA)
- Support in contract negotiations to optimise the effects on your future results
- Identification and determination of fair values for the acquired assets and liabilities (performing the PPA)
- Accounting for complex earn-out clauses using binomial models or Monte Carlo simulations
- Analysis of the effects on your balance sheet ratios and covenants
- Determination of scope for accounting discretion
In such cases, it is very unlikely that your auditor will be able to provide support, since advising on the transaction carries the risk that the auditor will no longer be independent in any subsequent audit of the transaction and the resulting assets and liabilities.
Intellectual property valuation
Many companies are not aware of the value of their patent portfolio. Because internally-developed patents and technologies can only be recognised in the balance sheet under limited circumstances, management has no information concerning the hidden underlying values.
An ongoing, systematic valuation of the patent portfolio has two main advantages.
With respect to patents in use, information is transferred to the strategic controlling function.
On the one hand, regular reviews of the value of the patents provides information on their expiration. This acts as an early warning system for management with regard to expiring competitive advantages.
Furthermore, the amortisation of the patents enables a more precise determination of the full costs of the related products.
With respect to patents not in use, management obtains information about non-operating capital. In this case, patents might be disposed of or, if desired for strategic reasons, licensed to other companies.
If you are interested in purchasing or disposing of patents, we are happy to assist you in valuing them.
Share-based payment valuation
Since the publication of IFRS 2 in February 2004, companies which prepare their accounts according to IFRS have had to expense share option programmes.
In accordance with IFRS 2, stock options must be valued on the basis of an accepted valuation model for options - generally a binomial model or a Monte Carlo simulation. The complexity of the option pricing models and the range of parameters that influence them frequently lead to application difficulties in practice and require considerable amounts of time. In this connection, IFRS requires a wide range of model parameters to be taken into account, such as the exercise price, duration of the option or volatility of the share price.
FAS AG uses a valuation model appropriate to the valuation purpose and the design of the respective stock option programme. The required relevant capital market parameters, such as the calculation of volatility or determination of the term-specific risk-free interest rate, are determined using specific databases.
Project-related valuation
We support you in making project-related valuations in connection with your company’s investment decisions, especially when specialist valuation expertise is required.
Below are some examples of questions we can answer for you:
- I want to relocate a plant. What is the value of this move? When will this investment pay for itself?
- I am planning to enter a new market environment. How do I account for high inflation in the company planning and business valuation?
- What options do I have for continuing my investments and how will they affect their valuation?
- What impacts will changes in capital structure have on the business value?
We prepare an integrated balance sheet, cash flow and profit and loss plan for your project and explain in a detailed report which assumptions are particularly critical for the success of your project from a valuation perspective.
We also help you to set up a conventional capital budgeting process with the desired level of detail and train your staff in the principles of valuation.
Financial restructuring
Companies are subject to continuous changes. These changes are based on a huge variety of causes: new competitors influencing the market environment, key customers withdrawing from the market, shifts in consumer demand. In a changing environment, a failed action may quickly jeopardise the company’s ability to continue as a going concern.
In stressed financial situations, investors are increasingly demanding financial restructuring reports from external third parties before making important investment decisions. Such reports provide the information needed to make the best possible decisions in relation to the investment.
In an independent business review or restructuring reportwe do the following:
- Assess the company’s current financial situation
- Prepare or revise the short-term liquidity plang
- Assess the plausibility of the business plan and restructuring measures
- Analyse the company’s competitive situation and illustrate its strengths and weaknesses
- Prepare a detailed report on the findings of our work
This provides investors with an independent assessment of the company and thus with the transparency needed to make decisions.
In a stressed financial situation, § 252 (1) No. 2 HGB requires the preparation of a going concern forecast for accounting purposes.
The company meets the status of a going concern if it can avert threats such as insolvency or over-indebtedness for at least one year.
The auditors’ audit opinion on the financial statements is tied to a positive going concern status. We examine the company’s ability to continue as a going concern and prepare a detailed report thereon.
Post-merger integration
In order to achieve the synergies required from an acquisition, the companies involved must be integrated during the post-deal phase (post-merger integration) is necessary.
The degree of integration - either purely as an investment of full integration - depends on the desired synergies and the organisational needs.
While leveraging the synergies required by managers and investors comes under the “voluntary” part of an acquisition project, ongoing compliance with legal requirements and the earliest possible fulfilment of shareholder and stakeholder requirements are entirely compulsory, and should not be underrated.
Therefore, regardless of the degree of integration, acquisitions place extremely high demands on the financial organisation of the business units involved during the post-deal phase.
Integration, harmonisation and often even conversion to international accounting standards (IFRS, US GAAP) must be performed within a very short timeframe and put on a stable and sustainable footing.
The main tasks include in particular:
- Analysis and development/implementation of measures relating to technical and operational problem areas in business processes in the fields of finance, human resources, sales, purchasing and IT.
For accounting and finance especially:
- Development of a uniform chart of accounts and creation of shared account assignment and accounting guidelines,
- Standardisation and integration of process and methods for financial statement preparation as well as preparation of the consolidated financial statements, notes to the financial statements and the management report,
- Development of a reporting system with uniform financial ratios for sustainable controlling of the acquired business units,
- Introduction of a common IT system and development of various transition solutions (e.g. reporting packages), since only in the rarest of cases will the acquired company use the same IT systems.
