Family business owners have a problem.

Your company shares look more valuable on paper than they actually are.

In the case of an inheritance or a divorce, the tax authorities or former spouses and life partners then regularly ask you to pay a lot, even though there is less in it than expected.

"The methodology for evaluating company shares is on its head because we don't really evaluate the individual shares, but the whole company," says Rainer Kirchdörfer, who is not only a member of the Board of Directors of the Foundation for Family Businesses, but also advises entrepreneurs as a lawyer who are in sitting in the clamp of valuation law.

Mark Fehr

Editor in Business.

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In view of this explosiveness, the economist Klaus-Dieter Drüen and the lawyer Fabian Janisch, both from the Ludwig-Maximilians-University in Munich, have prepared a study on the tax assessment of shares in family businesses.

The client was the Foundation for Family Businesses.

Unlike shares, company shares are spared from strong market fluctuations because they are not traded on the stock exchange.

But other problems arise in the course of their evaluation, explains lawyer Kirchdörfer: Before the law, a 10 percent stake in a family business is worth a tenth of the entire company.

That sounds logical at first.

However, what is neglected is that family shareholders are often only allowed to take significantly smaller profit shares and cannot sell their shares freely.

Investors enforce discounts

According to Kirchdörfer, the articles of association often stipulate that with a 10 percent share, only a profit share of around 2 percent or less of the company's net profit can be taken.

The lawyer reports on a company heir whose inheritance tax burden was as high as the net profit distributions of the family company over 30 years.

"And that's exactly when the next generation change comes and the tax carousel starts all over again," says Kirchdörfer.

In addition, a sale of family company shares is normally only possible with the consent of the co-partners or generally only to other family members.

This is intended to protect the family's influence on the company, but also significantly reduces the value of the shares.

"It would be like if Siemens shareholders were only allowed to sell their shares with the approval of the general meeting," says Kirchdörfer.

Practical experience shows that investors actually enforce appropriate value discounts when they enter a family business.

"A private equity fund specializing in minority holdings therefore negotiates not only with the shareholder who is willing to sell, but then with all other family shareholders," reports Kirchdörfer.

The investors want to know exactly whether there are any bans on the resale of the shares or other restrictions that need to be observed.

To compensate, the funds then negotiate seats on the company's advisory board or the right to have a say in important transactions.

When the bubble bursts

The valuation right also has unpleasant surprises in store apart from company shares.

The reason is the stubborn deadline principle to which the law adheres.

That may make the authorities' work easier, but it can lead to grotesque situations: "In front of me was a company heir who was close to tears," recalls attorney Kirchdörfer of a somewhat older case.

The client's inheritance included a share portfolio whose previous owner had died shortly before the Neuer Markt bubble burst in 2000.

In accordance with the law, the tax office calculated the securities assets at the highest prices on the day of the deceased's death and therefore demanded correspondingly high taxes from the heirs.

But he couldn't raise that much money because the prices had collapsed in the meantime.