Simulation-based Valuation of German Mid-sized Firms: A Risk-oriented Alternative to Traditional CAPM Approaches

The valuation of small and medium-sized enterprises (SMEs) is a key task for corporate transactions, succession planning, capital raising and changes in the shareholder structure. In Germany, the valuation of small and medium-sized companies is mainly based on the IDW S 1 standard, which requires the use of the Capital Asset Pricing Model (CAPM) to derive the risks of a company from the capital markets. The CAPM itself is based on very restrictive assumptions that are not suitable for the valuation of SMEs. A notable gap in the literature exists in the development of valuation methods that directly incorporate company-specific risk data instead of relying on market-based proxies, especially in light of recent legal and regulatory changes (e.g., StaRUG, IDW PS 340) that now require SMEs to systematically document and manage risk. To address this issue, the study proposes a simulation-based valuation approach that uses Monte Carlo simulations to aggregate firm-specific risks from internal planning systems and derive risk-adjusted values for cash flows and cost of capital. The results show that simulation-based valuation is not only consistent with modern regulatory and legal requirements, but also provides a methodologically sound alternative to CAPM by providing risk-adjusted enterprise values that better reflect the realities and challenges of SME valuation.