Capitalisation Rate: The Discount Rate That Moves Company Value

The capitalisation rate is the rate at which a company future earnings are discounted to present value. It consists of a risk-free base rate, a risk premium and — for the terminal value — a growth deduction. It is the most sensitive lever in any capitalised-earnings or DCF valuation: one percentage point more costs roughly a tenth of the value in the terminal value.

How a robust company valuation is built — and how the applied rate is justified — is set out on our services page. Our free company value calculator gives a first indication.

The three components

The capitalisation rate reflects the return an investor demands for an investment carrying your company risk. It is derived, not estimated:

Component	Where it comes from	Effect on value
Base rate	yield curve of German government bonds	higher rate, lower value
Risk premium	market risk premium times beta	riskier business, lower value
Growth deduction	expected sustainable growth	reduces the rate, lifts the value

Which of the two methods actually needs this rate is shown in capitalised earnings vs. DCF. The multiples method does without it — it derives value from market prices rather than from discounting.

The base rate comes from the yield curve

The risk-free base rate is not read off a single day yield but derived from the yield curve of German government bonds. The Svensson method has become the established approach; above 1.00 percent the result is rounded to quarter percentage points.

As at 1 September 2026 the base rate under IDW S 1 stands at 3.63 percent unrounded and 3.75 percent rounded (Kleeberg Valuation). The figure changes monthly, so any valuation must state the date on which it was determined.

What the standard otherwise governs, and where its limits are, is covered in IDW S1 explained.

The risk premium: market risk premium times beta

The risk premium answers how much more than the risk-free investment an investor demands. It is the product of two figures.

The market risk premium is the compensation for general equity market risk. The IDW technical committee for business valuation (FAUB) revised its recommendation on 16 September 2025: it now stands at 5.25 to 6.75 percent before personal taxes and 4.50 to 5.75 percent after personal taxes, down from 6.00 to 8.00 and 5.00 to 6.50 percent respectively (IDW). All else equal, the reduction raises values.

The beta factor transfers that market risk to your company. It is derived from a group of listed peers, adjusted for their leverage and then re-levered to the capital structure of the company being valued. A beta of 1.0 means average market risk, 1.3 above average.

For owner-managed companies a premium for owner dependency or concentration risk is common in practice. It requires justification — and it is precisely where buyer and seller are furthest apart.

The growth deduction applies only to the terminal value

For the period after the detailed planning horizon, earnings are assumed to grow at a constant rate. That growth is deducted from the capitalisation rate. The deduction is not a matter of preference: it must follow from the company pricing power and its industry outlook, not from general inflation expectations.

Worked example

A company with sustainable earnings of 500,000 euros, a beta of 1.2 and an applied market risk premium of 6.00 percent:

Item	Value
Base rate	3.75 %
Risk premium (1.2 times 6.00 %)	7.20 %
Cost of equity	10.95 %
less growth deduction	1.00 %
Capitalisation rate, terminal value	9.95 %

The terminal value is therefore 500,000 divided by 0.0995, around 5.03 million euros.

Why one percentage point is so expensive

The same 500,000 euros of sustainable earnings, with the rate varied:

Capitalisation rate	Value	Difference
8.95 %	5.59 m euros	+11 %
9.95 %	5.03 m euros	base
10.95 %	4.57 m euros	−9 %
11.95 %	4.18 m euros	−17 %

This is why negotiations rarely turn on earnings and almost always on the rate. Documenting the derivation properly — date, peer group, beta calculation, a reason for every premium — puts you in a considerably stronger position. The cross-check against market prices comes from EV/EBITDA.

What applies in Austria

In Austria the benchmark is not IDW S 1 but the KFS/BW 1 expert opinion issued by the Chamber of Tax Advisers and Auditors. Its revised version of 6 November 2025 is binding for engagements awarded after 30 June 2026. The logic is the same — risk-free rate plus risk premium — but the derivation of the base rate and the underlying capital market data are determined independently. Details are covered in calculating company value in Austria.

What this means in a sale process

In a sale it is not the theoretically correct rate that decides, but the defensible one. Three points repay preparation: the date on which the base rate was determined; a peer group that stands up to scrutiny for the beta; and the question of which risk premiums can be reduced operationally before the sale — owner dependency and customer concentration can be brought down noticeably within twelve to twenty-four months. The individual levers are set out in increasing company value.

This is an orientation, not a valuation or tax advice for your specific case.

FAQ

What is the capitalisation rate in simple terms?

It is the rate at which future profits are discounted to present value. The higher it is, the less a future euro is worth today — and the lower the resulting company value.

What is the current IDW S 1 base rate?

As at 1 September 2026 it is 3.63 percent unrounded and 3.75 percent rounded. It is derived monthly from the German government bond yield curve using the Svensson method and therefore depends on the valuation date.

What market risk premium does the FAUB recommend?

Since 16 September 2025 the FAUB recommends a range of 5.25 to 6.75 percent before personal taxes and 4.50 to 5.75 percent after personal taxes.

What is the difference between the capitalisation rate and WACC?

The capitalisation rate in the capitalised-earnings method reflects the return required by equity holders. WACC is the weighted blend of equity and debt costs and is applied in the DCF method to cash flows before financing.

How high may the growth deduction be?

There is no fixed ceiling, but it must follow from pricing power and industry outlook. A deduction justified only by general inflation expectations rarely survives buy-side scrutiny.

Why is the rate so contested in negotiations?

Because it moves value disproportionately. A one-point difference changes the terminal value by roughly a tenth — more than most debates about individual earnings adjustments achieve.

If you want to know which rate holds up for your company: the initial conversation with IGCP is free of charge, without obligation and strictly confidential.