What is the difference between Substanzwert and Ertragswert?

Substanzwert (Net Asset Value) measures what a company owns; Ertragswert (Earnings Value) measures what it earns. The Praktikermethode combines both at a 1:2 weighting. Understanding the difference is essential for any Swiss business valuation. ### Technical Explanation These two components form the foundation of Swiss valuation practice under Tax Circular No. 28. #### Substanzwert (Net Asset Value / Valeur de Substance) The Substanzwert represents the liquidation-adjusted net worth of the company: * Total assets at fair market value (not book value) * Minus all liabilities at face value * Includes hidden reserves: fully depreciated machinery still in use, understated real estate, conservative inventory provisions * For operating companies, uses going-concern asset values (replacement cost) * For holding companies, uses liquidation values Typical hidden reserves in Swiss SMEs add 30-60% above book value NAV. A company with CHF 1.2M book equity may have a Substanzwert of CHF 1.8-2.0M after uncovering hidden reserves. #### Ertragswert (Capitalized Earnings Value / Valeur de Rendement) The Ertragswert capitalizes sustainable earnings into a perpetuity value: $EW = \frac{\text{Normalized Net Profit}}{\text{Capitalization Rate}}$ * Uses average of last 2-3 years of adjusted net profit * Capitalization rate set annually by SFTA (e.g., 8.75% for 2024) * In commercial settings, rates of 12-18% are common for SMEs * Higher rate = lower value (more risk = more discount) #### Why Both Matter A company with high assets but low earnings (e.g., real estate heavy) will have Substanzwert > Ertragswert. A service company with few assets but strong profits will show Ertragswert > Substanzwert. The Praktikermethode's 2:1 weighting favoring earnings reflects that earning power is generally more important than assets.