TP Ticker – June 2020

Technical Advice on Valuation under Corona

Klaus Rabel published an article on the technical advice given by German and Austrian professional organizations on business valuations under the conditions of the Corona pandemic.  This refers to the Technical Committee for Business Valuation and Business Administration (“Fachausschuss für Unternehmensbewertung und Betriebswirtschaft”, in the following “FAUB”) of the German Institute of Public Auditors and the Working Group for Business Valuation (“Arbeitsgruppe für Unternehmensbewertung”, in the following “AGU”) of the Austrian Chamber of Tax Advisors and Auditors which have published their respective advises on 25. March and 15. April 2020.  The topics covered by the technical advice of the FAUB covers besides a general discussion of differences in the price formation on the stock market versus the value determination of fundamental analytical methods the questions of possible effects of the pandemic on the business plan and on capital costs.  Besides these topics, the AGU also covers the valuation date principle and the application of multipliers.  Regarding the business plan, both recommend the valuator differentiating between short and mid-term effects and the long-term effects of COVID-19 and adapting the business plan received by the client.  Furthermore, the AGU explicitly recommends developing different scenarios and weighting them by their likelihood.  For the capital costs, it is to differentiate between market risk premium and market return, the beta factor, and debt costs.  Both FAUB and AGU maintain their recommended ranges for the market risk premium and the market return from before the pandemic.  The AGU specifically explains that the capital markets already at the end of March seemed to have recovered from the turbulence that happened in February and returned to their long-term level.  FAUB does not address the beta factor and cost of debt.  On the beta factor, AUG comments that the market turbulence in February and March may easily lead to distorted beta estimates and that this potential issue can be addressed either by excluding data from this period or by choosing a longer analytical horizon.  For the debt cost, AUG makes a general recommendation to reconfirm, if the pandemic may have resulted in higher costs.  Regarding the information to be used for the valuation, AGU comments that the actual developments after the valuation date are only to be considered, if they were rooted in the situation at the valuation date and if they would have been recognizable with reasonable care.  For valuation dates up until the 31. December 2019, the AGU is of the view that the effects of Corona were not recognizable.  For later valuation dates, it recommends making a case-by-case assessment, based on factors specific to the business as well as its markets, if the effects would have been recognizable and, if yes, to which extent.  Finally, the AUG emphasizes that also when applying the market approach, reference parameters and multipliers can be subject to distortions and that the valuator should consider to which extent multipliers from before COVID-19 are still of significance.

From our perspective, especially the very extensive guidance provided by the AUG are helpful.  For business restructurings during the pandemic, they provide reasonable technical guidance and reference points for discussions with tax administrations.  Additionally, they reflect more general aspects when emphasizing that the reasonably available information at the valuation date and different future scenarios and their likelihood are to be considered.  These ideas are also contained in the OECD transfer pricing guidelines but still face difficulties of acceptance in practice.  Finally, the AGU advice explicitly recommends that the valuator adapts the business plan received from the client to develop a reliable valuation.  From time to time, this will objectively also be necessary in transfer pricing valuation but regularly results in difficult discussion with clients.  Reference to guidance like this may help to demonstrate that such critical adaption is helpful in increasing the reliability and justifiably of the analysis done by the transfer pricing valuator.

The article by Rabel was published on 29 May in “BewertungsPraktiker” Nr. 2/2020 on pages 34 through 36.