Excess values in company valuations using multiples ("multiple valuation") according to DVFA
DVFA GmbH (respectively the DVFA Commission "Standards for Research Reports") has elaborated the following principles in the DVFA Guidelines for Company Valuations in Equity Research on the topic of company valuation using multiples ("multiples method") (source: DVFA):
The basis for a company valuation using multiples is the consolidated financial statements. Deviations from this basis must be justified in the company valuation prepared by the valuer. In the case of a multiple valuation on the basis of the surplus figures EBIT, EBITDA, EPS, etc., the surplus figure used in the company valuation (result according to IAS, - according to GAAP, result according to DVFA/SG) should be indicated.
In the case of conspicuous and/or extraordinary components within the surplus variable with an influence on the company result used, these components must be shown and the effect of these components on the company result must be explained (the individual components must be explicitly named). The "principle of materiality" applies to extraordinary and/or striking components with an impact on the profit or loss figure used.
According to DVFA, the components to be disclosed that have an influence on the surplus are in particular:
- Treatment of IPO costs for initial public offerings
- Capitalised development costs and own work and depreciation thereon
Depreciation - Effects on results of transformations of legal form
- Treatment of any loss carryforwards
- Regulation on goodwill amortisation
- Treatment of amortisation of intangible assets, if any
intangible assets - Results of an impairment test carried out
- Effects on results of a change in the dividend payout ratio and the resulting
tax effects triggered thereby - Treatment/consideration of stock option programmes
- Treatment/consideration of share buyback programmes
Company valuation - multiples method
For the company valuation using the multiples method, the multiples (EBIT, EBITDA, EPS, etc.) of at least two consecutive future business years are to be used. If the time of the enterprise valuation is in the first or second quarter of a year, the earnings figures of the current and the following business year are to be used for the calculation of the enterprise value on the basis of multiples. If the enterprise valuation is prepared on the basis of multiples in the third or fourth quarter of a year, the earnings figures of the following and the next but one business year should be used as the basis for applying the multiples (EBIT, EBITDA, EPS, etc.).
In the case of the multiple valuation, the number of shares used as a basis should be stated. When using the multiples, the following applies: "In principle, according to DVFA, the absolute surplus figure used to determine the multiple and the corresponding absolute price figure (with indication of the chosen cut-off date) must be published for each company. The source of the data used (e.g. May 2005 3 IBES) must be indicated.
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