Business valuation and case law

Notes for the valuation and advisory practice

Business valuations are never without purpose. Companies are valued in order to determine assets (purchase, sale or taxes), to substantiate claims (compensation or settlement payments) or to substantiate financial decisions (fairness opinion). In the event of a dispute over the reason for the valuation, the company valuations are usually also the subject of the proceedings. Swiss courts are increasingly dealing with company valuations. The following article provides a synoptic overview of questions relating to valuations required by law and the case law that has been handed down in this regard.

Starting point: Methodological pluralism or arbitrariness?

Business valuation is the supreme discipline of business management consulting. Business valuation is also a legal question that is answered between economists and lawyers in a division of labour: “The expert must not merely know business valuation, but be able to do it; the judge must understand it, otherwise he cannot examine, confirm or reject it”. In doing so, the judge must “exercise restraint and not place his knowledge above the expertise of the experts, but generally limit himself to examining obvious contradictions in the expertise”. Business valuations thus ideally become a “meeting subject”, but often a question that “threatens to sink into the seams and crevices between disciplines”.

Federal Supreme Court recognises various procedures

As far as can be seen, the Federal Supreme Court has so far not rejected any valuation method outright as unsuitable. In principle, any valuation method is accepted that is “comprehensible, plausible and recognised, is widely used in comparable cases, is justifiably better or at least as proven as other methods and takes account of the circumstances in the specific individual case”.

Principle of future orientation

However, this pluralism of methods does not mean arbitrariness. The tendency in practice towards future-oriented valuation methods (future performance methods such as DCF or capitalised earnings value methods) is also reflected in case law: According to this, the “principle of the future-relatedness of all valuation factors is recognised. The past only provides empirical values”. Furthermore, it is assumed that “the use of newer methods, such as the DCF method, leads to a more accurate determination of the value” than, for example, the practical method. The line is drawn where valuations “deviate without reason from principles recognised in doctrine and case law”.

Technical Note Business Valuation of SMEs

Company valuations in Switzerland – similar to Germany and Austria – are predominantly carried out by auditors and accounting experts. Unlike there, however, there is no binding standard for business valuations in Switzerland to date. The EXPERTsuisse “Fachmitteilung Unternehmensbewertung von kleinen und mittleren Unternehmen (KMU)” (FM 2018) adopted in 2018 changes this. Although it is not a binding standard in terms of quality, it is at least a framework within which the solution of the respective individual case is at the discretion of the valuer. Furthermore, there is a presumption that a company valuation based on FM 2018 is also proper.

We take this as an opportunity to point out special features of valuations required by law and to explain relevant case law against the background of valuation practice and FM 2018.

Read the full article from Anwalts Revue 8|2018 here (in German).