Revision of IDW S1 – More Clarity in M&A Processes

published on 28 January 2025 | reading time approx. 3 minutes

The revision of the IDW S1 sets new standards for business valuations in M&A processes. By clearly differentiating valuation roles and increasing transparency, the standard establishes a solid foundation for stronger negotiation positions and greater legal certainty.

On November 7, 2024, the “Fachausschuss für Unternehmensbewertung und Betriebswirtschaft” (FAUB) adopted the draft of the revised IDW Standard: Principles for Business Valuations (IDW ES 1 n.F.), addressing key professional guidelines for business valuations within its scope.

The revision of the IDW S1 standard by the “Institut der Wirtschaftsprüfer e.V.” (IDW) for business valuations marks a significant milestone for business valuation in Germany. The new standard places a greater emphasis on distinguishing between different valuation roles and increasing transparency in the presentation of results. In particular, for M&A processes, the enhanced transparency created by this revision adds value by improving the quality and legal certainty of business valuations.

Background and Purpose of the Revision

The IDW S1 has been the central standard for business valuation in Germany for years. It is used by auditors, experts, and consultants to ensure uniform methodology and qualitative standards. The revision was necessary to align the standard with current developments in valuation theory and the legal framework. The goal is to create a clearer distinction between the roles of the valuator and to enhance the transparency and traceability of valuation reports.

New Differentiation of Roles

A central feature of the revision is the explicit differentiation of the valuator's role. The IDW S1 now clearly distinguishes between:

Appraisal Report in the Role of a Neutral Appraiser

An appraisal report in the traditional sense is created when the valuator acts as a neutral appraiser. The focus here is on the objective and independent determination of a business's value, which may be relevant to various stakeholders such as courts, tax authorities, or conflicting parties. This role requires the highest level of impartiality and transparency in methodology. In an M&A process, an IDW S1 appraisal report can, among other things, be used for governance purposes (e.g., presentation before various committees in approval processes for potential investments, documentation requirements in acquisition processes, etc.).

Statement in the Role of a Neutral Expert

In this role, the valuator provides an opinion on an existing valuation report or specific valuation issues. This could occur, for example, in an M&A transaction when one party seeks to verify the plausibility of an existing expert report. The statement is based on a neutral and critical review and also requires impartiality.

Valuation in the Role of a Consultant

In this role, the valuator acts as a consultant and determines the value for a specific transaction or negotiation. This role is more influenced by the interests of the client. However, the transparency of the methodology used remains a central component to maintain the credibility of the result.

Impact on M&A Processes

Clear Definition of Valuation Goals

The new differentiation of roles requires an early definition of the valuation goals in the M&A process. Parties must clarify whether they need an objective valuation, a critical opinion, or an interest-driven valuation. This clarity helps avoid potential conflicts and misunderstandings and increases legal certainty for all stakeholders.

Better Negotiation Foundation

With the clear differentiation of roles and the enhanced transparency of the valuations, parties in an M&A process gain a stronger basis for negotiations. The separation of objective expert reports and interest-driven valuations makes it easier to classify and compare different valuations.

Consideration of Uncertainties

The revised IDW S1 places greater emphasis on considering uncertainties and scenario analyses. This is particularly relevant for M&A transactions, which often involve high risks and forecasting uncertainties. Valuators are encouraged to develop different scenarios and clearly present their impact on the business value.

Challenges and Opportunities

The changes to the IDW S1 present both challenges and opportunities:

Challenges:

More Complex Planning: The clear differentiation of roles requires early alignment between the parties and a detailed clarification of the valuation goals.

Increased Requirements: Transparency and documentation obligations increase the workload for valuators.

Opportunities:

Higher Quality: The improved transparency and clear methodology contribute to higher-quality valuations.

Stronger Legal Certainty: The new differentiation of roles minimizes legal risks and potential challenges to valuation reports.

More Efficient Processes: The clearer distinction between valuation types facilitates the transaction process and reduces potential conflicts.

Conclusion

The revision of the IDW S1 represents a significant step forward for business valuation in terms of transparency and the quality of deliverables. In particular, for M&A processes, the clear differentiation of valuation roles and the increased focus on transparency offer considerable advantages, such as the distinction between objective valuation in the role of an expert and valuation in the role of a consultant. Overall, the new standard promotes higher quality and traceability in business valuations, thereby contributing to more successful transactions and greater legal certainty.