Fair Market Value

What is fair market value?

Fair market value (German: Verkehrswert, also Marktwert) denotes the price at which an asset or a shareholding in a company would change owners in an ordinary sale. The assumption is knowledgeable, mutually independent parties willing to conclude, neither of which is under time or sales pressure. Someone who has to sell a car within a week therefore does not necessarily achieve the market value; what is meant is the price a sale without haste would yield.

The term originates from US law, above all tax law. In German law, it corresponds to the Verkehrswert and, for tax purposes, the common value (gemeiner Wert) under the German Valuation Act (Bewertungsgesetz, BewG). In German contracts, the English expression appears above all in English-language shareholders' agreements. What is meant then is the market value, whose determination the contract itself should regulate. For growth companies, it is needed above all for the leaver rules of the shareholders' agreement and for tax occasions. In both cases a value must be established as of a reference date even though there is no market price.

Market value and common value in German law

Market value (Verkehrswert)

A statutory definition is contained in Section 194 of the German Building Code (Baugesetzbuch, BauGB) for land: the market value is the price that would be achievable in ordinary business dealings without regard to unusual or personal circumstances. For company shares, case law and contract practice use the term in the same sense. If the articles of association of a GmbH (German limited liability company) contain no different provision, the compensation a shareholder receives on the redemption of their share or on their exclusion is based on the full market value. Articles clauses that limit compensation are in principle permissible but, according to case law, must not become grossly disproportionate to the market value.

Common value under the Valuation Act

Tax law uses the common value. Under Section 9(2) BewG, this is the price that would be achievable on a sale in ordinary business dealings given the nature of the asset. Unusual or personal circumstances are disregarded. For shares in unlisted corporations, Section 11(2) BewG sets an order. Primarily, the value is to be derived from sales between unrelated third parties that took place less than a year ago. If there are no such sales, it is to be determined taking earnings prospects into account or by another recognised method that is also customary outside tax law. In this determination, the net asset value forms the lower limit, that is, the sum of the common values of the individual assets less the debts.

Calculating fair market value for unlisted shares

For growth companies, the obvious reference point is usually the last funding round, in which unrelated third parties paid a price per share. That price, however, applies to shares with the rights that investors receive in the shareholders' agreement, in particular a liquidation preference, that is, priority in the distribution of a later sale's proceeds. How round prices are to be used for tax purposes and whether shares without preferential rights are to be valued lower is not conclusively settled and is to be assessed in the individual case with the tax adviser.

If no usable transaction exists, the value is determined with a recognised method of business valuation. In practice this is often a capitalised earnings value or DCF method under IDW S 1, the valuation standard of the Institute of Public Auditors (Institut der Wirtschaftsprüfer). The Valuation Act additionally offers the simplified capitalised earnings method of Sections 199 to 203 BewG. The annual earnings are derived from the operating results of the past three financial years and multiplied by a statutorily fixed factor.

Formula (simplified capitalised earnings method): capitalised earnings value = sustainably achievable annual earnings × capitalisation factor 13.75 (as of 2026)

The method thus looks to the past and therefore fits growth companies with start-up losses poorly. It must not be applied if it leads to obviously incorrect results.

Fair market value in leaver clauses

In shareholders' agreements, the market value is the most important price measure of the leaver rules, which determine what happens to the shares of a departing founder. If a founder leaves, the company, fellow shareholders or investors typically receive a call option on their shares, that is, the right to acquire them at a price fixed in advance. A good leaver, who leaves for example because of illness or after a termination without good cause, keeps their earned shares or receives the market value for them. Unearned shares revert at nominal value, the nominal amount of the share in the company, usually EUR 1. A bad leaver leaves, for example, after a serious breach of duty. For them, the price is often limited to the lower of nominal value and market value or reduced by a discount.

Because the clause must work without a market price, the agreement also regulates the procedure: the reference date, for example receipt of the notice of termination, the valuation method and the person who determines the value bindingly. Common are an expert determination (Schiedsgutachten) by an independent auditor under Sections 317 et seq. of the German Civil Code (Bürgerliches Gesetzbuch, BGB), which is subject to only limited judicial review, or linkage to the price of a funding round that is no older than a certain period.

Tax occasions

• Gift and inheritance: unlisted shares are valued at the common value for inheritance and gift tax. If the compensation of a departing shareholder is below the tax value of their share, the transfer can be treated as a gift (Section 7(7) of the German Inheritance and Gift Tax Act, ErbStG).
• Shares for employees: if employees receive real shares in the company at a discount or free of charge, the price advantage is taxable as employment income (monetary benefit). It is measured by the common value less the price paid. Section 19a of the German Income Tax Act (EStG) allows deferral of taxation under certain conditions.
• Emigration: if a shareholder with a holding of at least 1% moves their residence abroad, the increase in value up to the common value can be taxed under Section 6 of the German Foreign Tax Act (Außensteuergesetz, AStG). This applies although no sale takes place and no proceeds flow.
• Reorganisation and contribution: the German Reorganisation Tax Act (Umwandlungssteuergesetz) in principle values assets passing over and shares contributed at the common value. Valuation at the previous book values (Buchwertansatz), which avoids immediate taxation, is possible, for example when building up a holding structure, only on application and subject to conditions.

Worked example: fair market value in a leaver case

A founder holds 25,000 shares with a nominal amount of EUR 1 each. They are subject to reverse vesting over 48 months: the shares belong to her from the start, but on early departure she must transfer back the part not yet earned. After 30 months she leaves. The shareholders' agreement provides: for a good leaver, the unearned shares are transferred at nominal value and the earned ones remain. For a bad leaver, all shares are transferred, the earned ones at 50% of the market value, the rest at nominal value. The market value is deemed to be the price per share of the last funding round if it was less than 12 months ago. It took place 9 months ago at EUR 40 per share.

• Earned shares: 30/48 of 25,000 = 15,625
• Unearned shares: 25,000 minus 15,625 = 9,375
• Good leaver: transfer of 9,375 shares at EUR 1 each = EUR 9,375; the remaining 15,625 shares have a market value of 15,625 × EUR 40 = EUR 625,000
• Bad leaver: 15,625 × EUR 20 = EUR 312,500 plus EUR 9,375 for the unearned shares, together EUR 321,875
• Economic difference for the founder: EUR 625,000 value of the retained shares plus EUR 9,375 payment as good leaver minus EUR 321,875 payment as bad leaver = EUR 312,500
• Market value of the transferred shares less payment in the good leaver case: 9,375 × (40 minus 1) = EUR 365,625
• Market value of the transferred shares less payment in the bad leaver case: 25,000 × EUR 40 minus EUR 321,875 = EUR 678,125

For the founder, classification as good or bad leaver thus decides EUR 312,500. The last two lines show the tax side: to the amount of these figures, the company or fellow shareholders receive shares below the agreed market value. If the tax value also lies above the payment, the transaction can be treated as a gift by the founder under Section 7(7) ErbStG. Whether this applies in the individual case belongs in the tax review before the clause is notarised.

Distinctions: fair market value, going-concern value and fair value

• Going-concern value (Teilwert): the amount an acquirer of the entire business would attribute to an individual asset in the total purchase price (Section 6(1) No. 1 sentence 3 EStG, Section 10 BewG). It assumes continuation of the business.
• Fair value (beizulegender Zeitwert): the accounting term under Section 255(4) of the German Commercial Code (Handelsgesetzbuch, HGB) and IFRS 13. It describes a sale price between market participants on the valuation date.
• Valuation range: the band of values with which a transaction is prepared. Fair market value, by contrast, requires a specific value as of a reference date.

Common mistakes

• Transferring US rules of thumb. Discounts and methods from US valuation practice for employee options have no basis in Germany. In Germany, the Valuation Act and the contractual rules apply.
• Procedure not regulated. If reference date, method and appointment of the expert are missing, a dispute over the value can arise in the leaver case that is hard to settle without a market price.
• Contract value equated with tax value. A contractual definition does not bind the tax office. Gift tax and wage tax consequences follow the common value.
• Notarisation overlooked. Call options on shares in a GmbH agreed only in private written form do not satisfy Section 15(4) of the German Limited Liability Companies Act (GmbH-Gesetz, GmbHG), and their validity is at risk.

Frequently asked questions

How is fair market value calculated?

For tax purposes in the order of Section 11(2) BewG. Sales between unrelated third parties in the last year take priority; otherwise earnings prospects or another recognised method count, but at least the net asset value. In a contract, the method agreed there applies, often the price of the last funding round or an expert opinion from an auditor.

Is there a procedure in Germany like the US 409A valuation?

No. In the US market, the exercise price of employee options must not, under Section 409A of the US Internal Revenue Code, be below the fair market value of the common shares on the date of grant. It is therefore regularly appraised there. German law knows no such obligation. The common value is determined on the respective tax occasion; the risk of the tax office taking a different view is borne by those involved.

Is the price of the last funding round the market value of the founders' shares?

Not automatically. The round price is an important reference point but applies to shares with preferential rights and reflects the investors' expectations at the time of the round. Shareholders' agreements therefore often state expressly whether and for how long the round price counts as the market value.

What role does market value play for virtual shares?

A smaller one than for real shares. Virtual shares establish a contractual payment claim that is taxed as employment income when paid out. A value is needed there mostly only for the base price on allocation or for the settlement of departing employees, and both follow the terms of the participation plan.

The Roemer Capital view

We deal with market value mainly in two situations: when we review shareholders' agreements before a funding round and when shares pass between shareholders in succession or sale mandates. In the first case, we make sure that the leaver rules set out reference date, method and appointment of the expert clearly and limit the linkage to round prices in time.

Where a value has to be established, we provide the economic foundations: financial model, planning and the derivation from round prices or comparative data. The tax assessment, for example on gift tax, and the legal drafting lie with the client's tax adviser and law firm. We do not promise a particular tax outcome, because it depends on the individual case and on the tax office's assessment.