Determination of business value is based. Business valuation methods. Valuation Model Harmonization

Business valuation is a rather complicated and expensive procedure, but sometimes it becomes the only right step before making strategically important decisions. When it becomes necessary to evaluate a business, what evaluation methods exist, and how to get the maximum benefit for the business from the evaluation, you will learn in the article.

Business valuation: what is it and when is it needed

Let's make an analogy. If you are going to buy or sell a house with a plot, what do you make first? That's right - you are looking through advertisements for the sale of similar houses in selected areas in order to "ask the price", assign the right price to the house, based on the market situation and your expectations.

In fact, you will determine the price of assets (house and land) by comparing indicators such as:

1. Net assets - the amount of expenses that you or the owner of the house have incurred for the purchase and construction, repair and improvement.
2. Market expectations - the amount that buyers are willing to pay for a similar object on the market today.
3. Own expectations (investment expectations) - the amount in which you or the buyer estimates the future benefits from the acquisition of the object. It could be self-reliance, vacation time with grandchildren, or the health benefits of a self-grown crop. Or it could be the benefit of investing in buying a home if you plan to rent it out and / or sell it when the price rises.

With business, things are the same, with the only difference that it is impossible to find two at least approximately identical businesses. Even a typical coffee shop will have its own unique characteristics: traffic, coffee quality, team qualifications and motivation, interior design, etc.

When it becomes necessary to assess the business of an enterprise

Let's start with those cases where the obligation to evaluate a business is prescribed by law. According to you, you are obliged to conduct a business valuation in the following cases:

1. When making transactions involving the property of the Russian Federation, that is, if the state acts as one of the parties to a sale, lease or privatization transaction.
2. If there is a dispute about the value of the property. If a segment of a business, a property complex or an entire business is subject to pledge. Or if you have any disputes with the tax authorities about the correctness of the calculation of the tax base.
3. When making a contribution to the authorized capital in non-monetary form, the share in the capital of the enterprise cannot be determined without involving an appraiser.
4. When transferring an enterprise or property complex into a mortgage.
5. When mortgaging an enterprise or property complex.
6. When a joint-stock company buys out its shares at the request of shareholders. Shares must be redeemed at a price not lower than the market price - the price is determined by an independent appraiser.
7. In case of bankruptcy of the enterprise. The manager can start selling the property only after making an appraisal.

Those who voluntarily evaluate a business:

• wants to buy / sell a business or a share in a business. The seller does not want to lose in price, and the buyer does not want to overpay for what he cannot “touch”. Cm.,
• compares the investment attractiveness of a new project in an existing or new business with other ways of investing money. To find out what is more profitable: continue to develop the same niche, expand it, or invest in related areas or even in a completely different business;
• creates a franchise out of his business. Royalty cost and lump-sum payments can be determined only by understanding the initial price of the aggregate of assets that you want to sell (brand, business processes, image, contracts with suppliers, etc.);
• wants to improve the quality of management of the existing business, including restructuring, getting rid of unprofitable assets, identifying assets whose potential is not fully unlocked (see preparing for mergers or acquisitions. An additional incentive for evaluation appears - determining the synergy effect;
• plans to get a loan from a bank or fund secured by property. Having in hand the results of an independent appraisal, the borrower can demand more favorable terms on loans (see also, insures the property complex;
• transfers the rights to use intangible assets on a license basis;
• assesses damage from offenses in the use of intangible assets. Assessment documents will be irreplaceable arguments in court, since the offender will be obliged to pay the amount of proven damage and lost profit;
• plans to benefit from for tax optimization purposes;
• conducts a voluntary liquidation of a business.

Why do we need an assessment? Moving on to the section: How to evaluate a business?

Business valuation methods

Let's go back to the home buying analogy. There are three ways to evaluate a house:

1. The comparative method is to compare prices for similar houses on the market.
2. The costly method is to calculate how much money you need to buy the same land and build the same house yourself.
3. The profitable method is to predict how much value the purchase of this house will bring in the future.

So, the same methods are used to evaluate a business. Let's consider each of them in more detail.

Business appraisal methodology that suits the owner

The methodology for assessing a business should be chosen based on the specific goals of the owner. See - five ways to assess the value of a business, in case the owner buys or sells:

• a publicly traded company;
• share to society;
• operating business;
• additional infrastructure for your own business;
• an organization on the verge of liquidation or bankruptcy.

Comparative approach to business valuation

It is based on determining the value of an object by searching for similar objects and applying corrective factors to them.

Subdivided into:

• analog company method;
• method of transactions;
• method of industry coefficients.

Analog company method

The method of a company-analogue assumes the choice of similar companies being assessed in the formed stock market, and the method of transactions, as a special case of the method of a company-analogue, operates in the market of mergers and acquisitions.

The assessment algorithm for these two methods is similar:

1. Collect information and make a list of analogues.
2. Conduct a standard financial analysis of the statements of the assessed company and similar companies.
3. Multipliers are calculated for each company based on key indicators of financial analysis (revenue, profit, liquidity, financial stability, etc.). A multiplier is a coefficient that shows the relationship between a company's value and its key financial indicators.
4. Using statistical methods, averages are determined - the fashion or median of multipliers, which are multiplied by the indicators of the financial statements of the evaluated company.
5. Calculate the value of the company by reconciling the values \u200b\u200bobtained based on the use of different multipliers.

The business owner will do everything possible to inflate the sale value as much as possible. But even if the time allotted for the deal is not enough for a full-fledged due diligence, the CFO of the buying enterprise has every chance to find the catch and insure himself against fraud. It is enough to know the common and most popular techniques used by salespeople in order to embellish the real state of affairs in the company.

Industry ratio method

The method of industry coefficients is more widely used in Western markets, as there is a wider knowledge base and accumulated experience in transactions with the purchase and sale of companies by industry. Industry ratios are ready-made multiples calculated for companies in a specific industry.

The industry ratios method is suitable for rapid appraisal of small businesses and does not require an appraiser because it is easy to use. For example, it is known that the MIN multiplier for monthly revenue for a home appliance store is 1, and MAX is 2.

This means that it is possible to sell a home appliance store, whose monthly revenue is k $ 2000, for a minimum of k $ 2000 and a maximum of $ 4000.

For a restaurant, the industry multiples for the annual cash flow are MIN 1 and MAX 3, which means that with an annual flow of $ k15,000, the buyer will expect a cost from $ k15,000 to $ k45,000.

But in the realities of the post-Soviet space, the method of sectoral multipliers did not take root, since there is still no objective history on the business purchase and sale markets.

Pros of the comparative approach: the algorithm for using the method is quite simple, it is easy to check and update. The use of the method does not require significant time expenditures. The business value under the comparative method has already been updated to current market expectations.

Cons of the comparative approach: 1. Lack of information about companies - analogues due to the underdevelopment of the market for buying and selling a business; 2. the absence in the comparative approach of expectations for the prospects - both a super-profitable business in the future and a business in the downturn are valued the same.

A ready-made model in Excel for a quick assessment of business value

To evaluate the business on your own in a short time, use a ready-made model in Excel. It will calculate the cost using the net income capitalization method. A minimum of company data is required. Prepare a statement of income for the three years preceding the date of the assessment. You will also need a few numbers from the balance sheet at the last reporting date and the planned revenue for the coming year.

Costly approach to business valuation

The cost approach is not based on external factors of the existence of the business, but considers the business itself during the period of its existence. It is subdivided into the net assets method and the residual value method. Accordingly, the first is used to determine the value of a business "for sale" and the second is used to liquidate it.

Net assets method

Its task is to determine the amount of equity by subtracting the fair value of all liabilities from the fair value of all assets.

The formula for determining the value of a business using a cost approach:

The implication is that, in aggregate, a business cannot be cheaper than the assets it earned separately, and that a knowledgeable investor will not pay more for the business than would have to be spent on creating the same business from scratch.

The second statement of the cost approach is that the book value of assets is not equal to the market value. Therefore, in the cost approach, it is proposed to evaluate element by element:

• fixed assets;
• intangible assets;
• current assets;
• long term duties;
• short-term obligations.

To assess the market value of each balance sheet item, you can use both a cost approach and other approaches to assessment.

Example 1

We will evaluate the equipment on the balance of the enterprise using a costly approach.

According to the balance sheet, the cost of the equipment is 2,400 thousand rubles, the date of commissioning is 01.01.2015, the initial cost is 4,200 thousand rubles.

The cost of the equipment at the moment will be equal to:

Stack \u003d Sv - And

The cost of reproducing identical equipment consists of the purchase, modernization, delivery and installation costs and amounts to RUB 4,850,000, based on 2018 prices. The replacement cost is equal to the cost of reproduction.

We calculate the wear using the formula:

I \u003d IF + IM + IE

Depreciation of equipment for the period from 01.01.2015 to 30.11.2018 amounted to:

I \u003d 1160 + 520 + 250 \u003d 1 930 thousand rubles

The current cost of the equipment is 4 850 - 1 930 \u003d 2 920 thousand rubles.

Liabilities are appraised only if there is reliable information about their market or "cost" value; in other cases, they are given at the book value.

Example 2

Before the acquisition, the invited team of appraisers evaluates the target company using the net assets method. The net assets of the target company amounted to USD 5,500 thousand.

Balance sheet of the company for the current and previous year

Indicator	Current year, thousand USD			Previous year, thousand USD
Assets
Fixed assets
Intangible assets
Receivables
Other current assets
Total assets
Liabilities
Borrowed funds
Accounts payable
Total liabilities
Equity

Appraisers performed calculations and determined the current value of assets and liabilities of the balance sheet.

Indicator	Current value, thousand USD
Assets
Fixed assets
Intangible assets
Receivables
Other current assets
Total assets
Liabilities
Borrowed funds
Accounts payable
Total liabilities
Equity

Residual value method

They are used to evaluate a business or property complex, based on the assumption of their liquidation. The task of the method is to determine which assets can be sold and what their price will be.

Residual value formula:

Slikv \u003d Stack * (1 - Sq.pr) - Zprod

Example 3

The company decided to liquidate a warehouse complex consisting of a building, land under it, warehouse equipment, and machinery. The current cost of the complex, determined using the net assets method, was USD 8,750 thousand, but as a result of the assessment, it was determined that some of the equipment was very obsolete (by 85%) and it was not possible to find a buyer for it in a short time. Therefore, it was decided to dispose of this equipment. The equipment stack is 340 thousand dollars, disposal costs are 32 thousand dollars. The exposure period was adopted for 2 months due to the dismissal of personnel during this period. The forced sale ratio was 0.3. Selling costs were estimated at $ 45,000.

The liquidation cost will be:

Slick \u003d (8750 - 340 - 32) * (1-0.3) - 45 \u003d 5820 thousand dollars.

Pros of a costly approach: using the cost approach is fully justified for capital-intensive enterprises that are experiencing financial difficulties and do not have a positive outlook for the near future. The positive aspect of the cost-based approach is that it does not require information about analogs to implement it, which greatly simplifies the assessment in the conditions of non-transparent markets.

Cons of a costly approach: large expenditures of labor and time for its implementation, its isolation from the market (for example, an enterprise could invest millions in setting up a workshop using technology that is quickly outdated. Costs are high, market value is zero), and from the prospects for business development (high-tech startups cost nothing on the cost approach).

Determining the fair value of a non-public company is more difficult. Undoubtedly, the ability of a business to generate income is also the most important factor in value, but for a minority owner of a non-public company, the ability to provide a return on invested capital is equally important. If the amount of future cash flow can be calculated, then return on invested capital in this case is not a mathematical concept. In modern Russian conditions, it is the possibility of legal withdrawal of part of the profit that becomes a decisive factor in determining the price of a non-public business. As important as the business's ability to generate income.

Profitable approach to business valuation

This is a favorite approach of all investors and businessmen, because each of the methods considers investments as a tool for making a profit in the future, and not as a way to acquire useless assets.

The income approach is based on the assumption that the business will generate cash flows (income) in the future, which can be recalculated today. The most common methods of the income approach are:

1. Income capitalization method;
2. Cash flow discounting method.

Income capitalization method

The simplest of the two methods is based on the assumption that the business is developing steadily and will bring conditionally the same income over the medium - long term.

According to the income capitalization method, the value of a business (share in a business) is equal to the normalized annual return divided by the capitalization rate, that is, it is calculated by the formula:

Normalized profit can be selected from:

• business net profit for the last year;
• estimated profit for the first subsequent year;
• dividends for the past year;
• calculated dividend for the next year;
• the same values \u200b\u200baveraged over the past 3-5 years.

The capitalization rate, in turn, is determined as the return on alternative investments by the formula:

Example 4

The investor decides whether to enter a share in a business that has consistently brought its owners an income of $ 5,000 for 5 years. The forecasts for the functioning of the business are positive, that is, it is planned that it will continue to bring in $ 5,000 or even more. annually. Sale of a 30% stake is being discussed. An alternative to investing money for the investor will be another project with a yield of 19% and similar risks.

The investor calculated the maximum purchase price of a share using the income capitalization method

Scap \u003d (5000 * 0.33) / 0.19 \u003d $ 8,711

By paying this money, he will receive an income equivalent to 19% per annum.

The plus of the capitalization method income - its simplicity. Among the cons - inability to take into account fluctuations in cash flows from period to period and the lack of accounting for the cost of project liquidation at the end of the period.

Well, if the business is young, is developing rapidly, or is exposed to other factors that make cash flows uneven over the years, then the method of discounting cash flows is used to evaluate it.

Cash flow discounting method

Based on the construction of a cash flow model for periods and the determination of the discounted cash flow balance.

The cash flow model can be built from two assumptions: the total investment in the project is estimated, or only equity capital. It is also possible to build cash flows in nominal prices today or in real prices that take into account inflation.

The choice of the period for building a cash flow model depends on the stability of the business. It is believed that after the billing period, the business will have to bring stable or steadily growing profits, so all fluctuations in the cash flow should be described in the model. In practice, models are often built for 3-5 years.

In order to fill the model with figures on revenue and costs, they conduct a retrospective analysis of the business, assess market expectations, competition, and available production facilities. Mathematical models for building trends are often used.

The investment forecast is made on the basis of investments in fixed assets and working capital necessary for the creation (development) of a business.

Upon completion of the project, its cost is not zero, but one of the following:

1. liquidation, if it is planned to close the business;
2. net asset value if sold;
3. cost according to the Gordon model, if you plan to continue the business and derive permanent income from it. See also how to use the Gordon model for asset valuation.

After entering all the data into the model, the net cash flow is calculated for each period and as a whole. But this figure is not yet the value of the business, since money in the future is cheaper than money today. In order to bring future revenues to their current current value, the flows are discounted, for which the discount rate is determined.

The discount rate is usually equal to the investor's return on risk-adjusted project expectations. It can be calculated using the capital investment method (CAPM) or.

As a result, the appraiser will receive a table graphically displayed in the figure.

NPV is used to calculate the value of a business by discounting cash flows.

Example 5

The team of appraisers from example 2 evaluates the company-target not only using the net assets method, but also using the income method.

All preparatory measures were carried out, a forecast for the functioning of the business for 5 years was made, the cost of capital and the terminal cost of the project were calculated.

Financial model:

Indicator
	thousand dollars	thousand dollars	thousand dollars	thousand dollars	thousand dollars
Sales of products
Raw materials, contractors
Personnel costs
Other operating expenses
Financial flows
Investment flows
Total CF

TV \u003d 2,510 thousand dollars

The cost of the business was calculated:

NPV \u003d -480/1 + 1114 / (1 + 0.11) + 2021 / (1 + 0.11) 2 + 2473 / (1 + 0.11) 3 + 2980 / (1 + 0.11) 4 + 2510 / (1 + 0.11) 5 \u003d 6836 thousand dollars

Pros of a profitable approach: when forming the value of a business, the prospects and value brought to the investor are taken into account.

Cons of the income approach: this method is the most subjective of the possible, because forecasts for the future are made with a high degree of uncertainty, and the position of the evaluator (optimistic or pessimistic) plays an important role here. The emergence of figures on income and expenses is difficult to objectively prove, therefore, the degree of confidence of information users in the income approach is reduced.

Benefits of using different approaches to business valuation

In conclusion, a few words about profitable juggling with numbers, as a bonus for those who have read the article to the end.

As you may have guessed, the assessment results obtained using different approaches differ. Sometimes they can differ by a factor of ten or more.

Therefore, never agree to an offer from an appraiser or business partner to evaluate a part or a business entirely with just one approach. Compare alternatives and look for a better one.

What do you think the investors who were evaluating the company - the takeover target from examples 2 and 5, what valuation method was advertised? Of course, the valuation is based on net assets. And they offered to take over the company for $ 5,500,000, while they themselves had in mind an income of $ 6,836,000.

The final choice of a business price between several approaches is not legally fixed anywhere, it can be a choice of a single price, or a weighted average between several approaches, in general, there is room for imagination.

In this article, you will learn:

• What is the value of a company and what is it for
• What are the types of company value
• How to calculate the value of a company
• How to quickly calculate company value
• What are the features in managing company value
• How to increase company value

A business exists not only to receive funds for goods or services, for the sake of which it was created. Business is also an investment. Many entrepreneurs make money by organizing and launching new companies with the aim of further selling them. Although this is far from the only reason for selling a business. When a company goes bankrupt or cannot solve its problems on its own, it is often necessary to assess the value of the company before selling. In this article we will talk about how to understand everything related to the value of your business and avoid difficulties.

Why you need to know the value of the company

Now the overwhelming majority of firms in Russia do not consider the appraisal of the company's value to be something necessary, and their owners often do not see the point in this until the business reaches high turnover and the public arena. Until then, the appraisal was perceived as a reason for the owner's personal pride.
The economic goals of calculating the value of the company are actually about twenty, but the most important are only three:

1. This provides objective data on the state of the business and the effectiveness of the management apparatus in it. By reacting to them, the owners can always correct the course in time.
2. It is impossible to apply for additional cash injections to investors without information about the real value of the company, otherwise you risk not getting what you came for.
3. The assessment allows you to take into account the assets that have arisen in the course of the economic activity of the firm in an extremely correct and competent manner.

Of course, it is necessary to estimate the cost not only for buying or selling a ready-made business. This indicator is important for strategic management company. A clear understanding of the value of your business will also be required when issuing securities, shares and entering the stock market. It is also significant that not a single investor will agree to invest their money where the company's value has not been assessed.
Enterprise business valuation (business valuation) - nothing more than the determination of the value of the company as non-current and current assets that can bring profit to the owners.

When conducting an appraisal examination it is necessary to assess the value of the firm's assets:

• real estate,
• equipment and machines,
• stocks in warehouses,
• all intangible assets,
• financial investments.

Business is an investment commodity. Any investment in a company is made only with a long-term focus on the return of funds with a profit. Since quite a lot of time passes between investments and income in business, in order to determine the real value of the company, the specialist analyzes its activities over a long period and separately evaluates:

• past, present and future income,
• efficiency of the entire work of the enterprise,
• business prospects,
• market competition.

After receiving this data, the evaluated company is compared with other similar firms. Only a comprehensive analysis helps to calculate the real value of the company.



Assessment of the value of an enterprise or company Is the process of finding out the maximum likely price of a business as a commodity when it is sold to other owners. Moreover, any enterprise can be sold as a whole or in parts. The company as the property of its owner can be insured, bequeathed or used as collateral.

What are the types of company value

The appraiser's activities are regulated by the federal standard "The purpose of the assessment and types of value" (FSO No. 2), which determines several main types of value for any object of assessment:

1. Market value.

The market value of an appraised object, for example a business, is the most probable price at which it can be sold on the day of appraisal under the following conditions: the alienation takes place in an open market with existing competition, the parties to the transaction act reasonably and have complete information about the subject of sale, and its value is not affected by any force majeure circumstances.
The market value of the company is needed in the following cases:

• when the property of the company or the enterprise itself is seized for state needs;
• when the price of the outstanding shares is determined, which the company buys by decision of the meeting of shareholders or the supervisory board;
• when you need to determine the value of a company acting as collateral, for example, with a mortgage;
• when the size of the non-monetary part of the authorized capital of the company is determined;
• when the owner goes through bankruptcy proceedings;
• when it is required to determine the amount of property received free of charge.

The market value of the company applies in all situations where tax issues, both federal and local, are being resolved.
It is this type of value that is always determined in transactions for the sale and purchase of a business or any part of it, since the market value is the most objective indicator and does not depend on the wishes of the participants in the process, it corresponds to the real economic situation.

1. Investment value - the value of the company, which is related to the profitability of the enterprise for a specific investor in the existing conditions.

This type of value depends on the personal investment requirements. Every investor invests his money in a business in order to get a profit in excess of the amount of invested capital, and not just the return of this "debt". So the investment value of the company is calculated based on the investor's expected income and the capitalization rate of these investments. This type of company value must be calculated when buying and selling a business, mergers, acquisitions of firms.

1. Liquidation value.

This cost option is calculated in a situation when the end of the company is expected for any reason (for example, reorganization, bankruptcy or division of the company's property). Determining the liquidation value of the company, they find the most probable size of the price at which the enterprise can be sold in the shortest possible period of exposure, provided that the owner of the object of sale is forced to enter into a transaction to alienate his property.

1. Cadastral value.

This is the market value approved and established by the legislation in the field of cadastral valuation of real estate. It is to this indicator that the methods of mass appraisal should come in the case of the cadastral value of the object. This type of value is calculated most often for property taxation.

What documents are needed to hold the estimated value of the company

1. Duplicates or copies of the constituent documents of the enterprise.
2. Documents for the inventory of the company's property.
3. Written confirmation of the structure of the company and the types of its economic activities.
4. For joint stock companies, duplicate reports on the issue of securities and copies of prospectuses will be required.
5. Fixed asset documentation.
6. If there is real estate for rent, then you need to submit copies of contracts.
7. To assess the value of a company, accounting statements for 3-5 years are required - about all the profits and losses of the business.
8. The final conclusion of the audit, if it was carried out at the enterprise.
9. A detailed list of all assets: tangible and intangible, in shares, bills of exchange, etc.
10. Deciphering of receivables and payables.
11. If the company has subsidiaries, then it is necessary to collect information about them and submit financial documentation for them.
12. A ready-made business development plan for the next 3-5 years, containing potential gross revenues, investments, expenses and calculation of net profit for each next year.

This is a preliminary list of documents that an appraiser will need to conduct an examination of the company's value, but it can be shortened or supplemented at the request of a specialist.

How to find out the value of the company

Obviously, one of the most objective indicators of the efficiency of an existing business is its cost. It makes it possible to calculate the price at which an enterprise can be sold on the open market in a competitive environment, or to predict the future value of the firm's goods. The question of how the valuation of a company is carried out is a serious practical task of high importance for any entrepreneur.
To obtain an adequate assessment, first of all it is worth define the main goalcost calculation procedures. The following options are most likely:

1. Determining the value of the company was required to perform some legal actions. In this case, they turn to a licensed independent appraiser, who draws up his opinion in the "Appraisal Report" regulated by Federal Law No. 135.
2. You need to find out how much your business is really worth in the market; in this situation, the official "Assessment Report" is no longer needed.

The fundamental difference in carrying out these procedures is not in the quality of the appraiser's work, but in the cost of services and in the form of an opinion. In the first case, the specialist is obliged to comply with the requirements of the current legislation governing his licensed activity, and usually these requirements significantly increase the price for the work.
In the second case, you will need to independently develop and clearly formulate the assignment for the appraiser, listing all the procedures you are interested in, the factors of the company's value and parts of the business that are subject to expertise. So, as a result, you will receive only the information that you need.
Business valuation means the calculation of its value as a property complex, which leads to a profit by the owner.
To calculate the value of a company, you need to take into account all of its assets, intangible and tangible: real estate, technical equipment, cars, warehouse stocks, financial injections. Further, past and potential incomes, plans for the development of the enterprise, competition and the economic environment are necessarily calculated. At the end of the due diligence, the data are compared with information about similar companies, and only after that the real value of the company is formed.
In the above calculations, the following applies. three methods:

• profitable,
• costly,
• comparative.

However, in fact, there are so many situations that they are segmented into classes, each of which requires its own approach and corresponding method.
To use the most suitable calculation method, you must first analyze the situation, the circumstances of the moment of assessment and other conditions.
For some types of business, the valuation of the company is carried out, as a rule, based on commercial potential.
For example, in the case of the hotel business, we are dealing with guests as the source of the firm's income. In a method called profitable, it is this source that will be compared with operating costs to assess the profitability of the enterprise. This method is based on discounting the profit from the rental of the company's property. Finally, after the appraisal, both the value of buildings and land are included.
The valuation of the company is carried out using cost methodwhen it comes to a business that cannot be bought or sold, as is the case with government agencies or clinics. This estimate takes into account the construction cost of the building, depreciation and depreciation of the property.
Comparative method used when there is a market for such a business. It is a market-based valuation method that relies on the analysis of similar properties already sold in other markets.
Hypothetically, all of the above approaches must give the same amount of value... But in fact, market conditions are not ideal, businesses are often ineffective, and information is inadequate and imperfect.
Determining the value of the company in each of these approaches allows use of different assessment methods:

1. For a profitable approach, these are:

• the capitalization method, which is used in the case of established companies that managed to accumulate assets in previous periods;
• a method of discounting cash flow for a young business, which will develop in the future. It is used when a company has a potentially promising product.

1. For the cost approach, the following are used:

• net assets method - when it comes to reducing the volume of issue or closing a business at the initiative of the investor;
• and the method of the company's residual value.

1. For a comparative approach, these are methods:

• transactions that are used in situations similar to those for the application of the net assets method;
• sectoral coefficients, evaluating operating enterprises that do not plan to close in the period after the examination;
• capital market. This method is also intended for "live" companies.

Please note that the last three methods are valid only if there is a similar business, which is the same type as the subject of assessment, otherwise the analysis will not be indicative. Next, we will briefly talk about the use of the named methods by which the value of the company is calculated.



If you need an estimate of the cost for the forecast period, then it will be determined discounted cash flows... The discount rate is applied to bring potential income to current value.
In this scenario, the calculation of the company's value is carried out according to the following formula:

• P \u003d CFt / (1 + I) ^ t,

where P - cost,
I - discount rate,
CFt- cash flow,
t Is the number of the time interval at which the evaluation takes place.
Do not forget to take into account that in the period after the forecast, your company will continue its work, which means that future prospects will determine the most diverse options - from explosive growth of the enterprise to bankruptcy.
It happens that the calculations are carried out using gordon's model, implying a stable and systematic growth in sales and profits of the company, as well as equal volumes of capital investments and the amount of wear.
For this situation, the following applies. formula:

• P \u003d СF (t + 1) / (I- g),

wherein CF (t + 1) Is the cash flow in the first year following the forecast period,
I - discount rate,
g - the rate of growth of the flow.
The Gordon model is most convenient to use when calculating the value of a company if the object of assessment is a large business with a large market capacity, stable supplies, production and sales, and is in favorable economic conditions.
If the bankruptcy of the enterprise and the further sale of property are predicted, then this formula is required to calculate the cost:

• P \u003d (1 -L cf) × (A -O) -P liquor,

where P - company value,
P liquor - liquidation costs (such as insurance, appraisal services, taxes, employee benefits and management costs),
ABOUT- the amount of obligations,
L Wed- a discount provided in connection with the urgency of liquidation,
AND - the total value of all assets of the company after their revaluation.
The results of calculations using the current formula are also influenced by the location of the enterprise, the quality of assets, and the situation in the market as a whole.

Quick calculation of company value using express appraisal

Express pricing model, which we will talk about in more detail, is based on the method of discounting cash flow for an enterprise already known to us. For convenience, we will abbreviate this term as dDP methodfor the company. These concepts, as we remember, operate in the profitable approach to the valuation of the company.
This approach is divided into the following most common in it assessment methods:

• method of calculating economic profit;
• dDP method;
• method of real options.

According to a lot of information, both direct and indirect, the DCF method is the most adequate in determining the value of a company. Provided that the criterion for the effectiveness and appropriateness of the method, we choose to display the behavior of the stock market (for example, the capitalization of an enterprise according to its data).
It's important that the DDP method has several varieties, corresponding to different purposes and differing in the techniques for calculating both the flow itself and the discount rate. Let's list the most popular varieties:

• DCF for equity capital of a joint stock company (Free Cash Flow to Equity);
• discounting DP for the company (Free Cash Flow to Firm);
• and one more type of cash flow discounting - for capital (Capital Cash Flow);
• the adjusted present value (Adjusted Present Value).

At the same time, the entire DCF method for an enterprise is based on this formula:

In which indices i and jthe ordinal numbers of periods (years) are indicated,
EV (Enterprise Value) - the value of the company,
D (Debt) - the cost of short-term and long-term debt,
FCFF stands for "free cash flow for the company", which does not take into account debt financing remaining after taxes (or operating cash flow),
E (Equity) is the amount of equity capital of the organization,
WACC(Weighted Average Cost of Capital) is translated as "weighted average cost of capital", which is calculated as follows:

r d - the cost of the company's capital, which is borrowed,
t - income tax rate,
r e - the amount of equity capital.
When calculating the value of companies in Russia, often the following simplifications are introduced:

1. Weighted average cost of capital WACCcan be designated as the discount rate - r... This move does not destroy the adequacy of the formulas, since for business in Russia the calculation WACC is not always possible. Because of this, analysts resort to different computation options.
2. And let's say the variable r throughout the years is constant. This is due to the fact that the determination of this indicator in Russia, even for one specific year, causes great problems and leads to a methodological stupor. So, if we do not introduce such a simplification, then we will unnecessarily complicate the entire model of express company valuation.

As a result of all the above transformations we get the expressionkind

The factors of the company's value within the described valuation model are any scalars and vectors that affect the value of the enterprise in the calculations.
Please note that predicting free cash flow for a firm for each year of an infinitely long period is quite difficult and this action makes little sense. This happens because the value of the terms with the index i too small because of the denominator, and an imperfect calculation of the numerator has almost no effect on the final result of this calculation. For this reason, the following popular practice is used an approach:

• the company's value is split into the forecast period and the post-forecast period;
• in the first period, cost factors are predicted based on assumptions and plans for the further development of the enterprise;
• on a post-forecast period of time, cash flows are estimated based on the hypothesis of a fixed rate of their growth throughout the entire period.

Valuation of the company: typical mistakes

Everyone who has come across an appraisal service knows very well that how it was calculated has a significant impact on the market value of the same business being appraised. The resulting amounts may differ several times. Such results often lead to serious financial damage, conflict and even litigation.
Let's call there are several main reasons for the variation in the value of the subject matter:

1. Methodological errors.

Inadequate value is obtained as a result of calculation errors, as well as due to methodological inconsistencies in assessing the company's value. Carefully study the experience and professional level of the appraiser.

1. Intentional distortion of value.

Unfortunately, to this day, a certain share of the market of services for the assessment of various objects is occupied by “custom” examinations. That is, the real cost can be underestimated or overestimated in the expert's opinion at the request of the customer.

1. Subjective expert opinion.

Despite the fact that the assessment procedure is based on specific values \u200b\u200band economically sound assumptions, this process remains largely subjective. So the result may depend on the evaluator's personal view of the future of the market, financial capabilities and other factors of the company's value. The decision on how to relate to economic conditions must be made by the expert conducting the analysis. And he will not always be able to predict even the most seemingly predictable things. Judge for yourself: who could have predicted the development of the oil market at 66 dollars a barrel two or three years ago, and not at 25 or even optimistic 30 dollars per unit?

1. Incorrect statement of the problem.

The size of the final cost, which will be obtained as a result of a comprehensive analysis and calculations, largely depends on the correct formulation of the problem, on the accuracy and adequacy of the choice of the type of cost and on the final goals for which the whole procedure is carried out. It is not surprising that one and the same security can be valued in amounts that differ by 20 or even 50%. This is influenced, for example, by whether it is in a minority or controlling stake. Depending on the purpose of determining the value of the company, the calculation process is carried out in different ways.

1. Distortion of official reporting.

The management of some enterprises deliberately goes to the discrepancy between real and official reporting. A distortion of this factor in the company's value inevitably leads to incorrect valuation results. This problem is even more aggravated in the case when it is necessary to make a settlement for a business, the share of which is pledged when receiving credit funds. Banks prefer to work not with management reporting, but only with the official one, which significantly changes the assessment indicators.

1. Deficiencies in legislation.

Nowadays, valuation experts turn to the three main methods of this procedure - cost, income, and comparative. The official assessment standards state that in the final calculation, it is necessary to take into account the results obtained in all three approaches. But these methods do not always correspond to the purposes of the examination.
List of factors to look out for, in order to clarify their meaning and get comments from an expert assessing the value of the company:

1. Cash flow forecast based on the results of the analysis and the discount rate reflecting the cost of attracting third-party capital - with an income approach.
2. The cost of all intangible assets (including those that are not included in this category according to the legislation of the Russian Federation) - with a costly approach.
3. Adequacy of multipliers (price ratios) and comparability of the analogue company with which the comparison is made - with a comparative approach.

Accurate assessment of a non-public company whose shares are not traded on the stock exchange is always a non-trivial question. Each stakeholder in the transaction can apply their own valuation methods and argue with others, defending the correctness of their own calculations. There is no universal recipe here.

Modern methods of company appraisal, I must admit, are not far from the classic book truths prescribed by Mason and Harrison. Business angels, private investors, venture capital funds and entrepreneurs continue to use ratios and multiples, discounted cash flows and net assets to evaluate businesses. But which method is right for you?

General Provisions

The valuation of the company assumes a number of assumptions, in particular, the real size of the market (it is especially difficult to “digitize” young, emerging industries), as well as the financial forecast. Often, an entrepreneur's business plans may not match the investor's vision.

Another subjective indicator is the degree of return required by the investor, which covers all his risks. The earlier an investor "enters" the company, the more profitability he requires. At the earliest stage of development, only one company in ten invested is profitable, said Konstantin Fokin, president of the National Association of Business Angels. “I work closely with companies, because I want the return on my portfolio to be your average, I expect that two out of ten portfolio companies can be successful,” says business angel Alexander Borodich about the realities of high-risk investment.

When evaluating the market and companies, entrepreneurs rely on similar transactions that have already passed, which will allow them to both get an approximate multiplier and understand the size of the market. The investor makes the final decision on the value, relying not only on the data of similar transactions, but also on his own intuition and the results of "trades" with the entrepreneur.

At the earliest stage of the company's development, the investor pays special attention to the analysis and other indicators of the company: team, potential demand for technology, systemic risks associated with the general economic and political background, as well as possible barriers to entry into the market of competitors.

At the idea stage, it is very difficult to give even a rough estimate of the future company - this is an equation with many variables.

But such an answer is unlikely to suit an investor. “Business angels invest in businesses, they are not involved in financing research projects,” says Igor Panteleev, executive director of the National Commonwealth of Business Angels. Most often, private investors refuse startups precisely because the young company lacks sales.

Discounted cash flow method

Suitable: For fast-growing, early-stage startups with little or no income.

Not applicable: to tech companies.

Basis of assessment: the value of the company is determined from the amount of free cash flow in future periods. The amount of the flow is discounted taking into account the risks of future years. The discount rate is based on the weighted average cost of capital.

Minuses: overestimation of the company's real value, inaccurate assumptions (the company's revenue in future periods, sales growth rates, risks, discount rate).

Method of multipliers and coefficients

Suitable: for solid and profitable companies with modest assets.

Basis of assessment: Comparison with listed companies with similar operating and financial structures. The valuation is based on several indicators: turnover, EBITDA, EBIT, annual growth. Transactions with similar companies that have been sold to strategic or financial investors are taken into account. Of great importance in this method is the ratio of the market price of a company's share to its net profit per share. The assessment determines the development potential of the company or the industry as a whole; as a result, the investor or entrepreneur evaluates the strategic value of the company.

Minuses: difficulties in finding a suitable analogue, closed nature of similar transactions, complex data collection process.

Net assets method

Suitable: for large companies with significant underlying assets.

Doesn't fit: for the sector of small and medium enterprises.

Basis for the assessment: balance sheet indicators of the company. An important plus of this method is the ability to qualitatively check the received value of the business based on its official accounting documents.

Minuses: it is difficult to assess intellectual property.

Other methods of assessing the value of companies

Lucius Carey's rule of thirds: the company is divided into three parts between investor, founder / director and management.

Competence rule: the assessment of the share of each party is based on the professional skills and competencies of the company's participants.

Greed rate: the investment amount multiplied by the business director's share is divided by the director's own investment multiplied by the investor's share. If the obtained coefficient is from 5 to 8, the company's assessment is adequate, if it is more than 10, the entrepreneur is greedy and gives too small a share to investors.

Real experience

Sergey Toporov, Senior Investment Manager, LETA Capital Fund:

We use different valuation methods - from discounted cash flows to the method of comparing projects by metrics and predicting the future value of the company. At our stage of investment, the most applicable, of course, is the forecasting of the future value discounted at the current moment.

The most effective assessment method is negotiation. We understand the minimum, comfortable and maximum assessment of the project for us. Next, we communicate with the project and correlate this assessment with the expectations of the founders. The figure that we stopped at is the real cost of the project today.

Margarita Vlasenko, curator of IT park projects in Naberezhnye Chelny:

We use the income method when evaluating the cost of IT projects. In Russian realities, it is extremely difficult to use the comparative method. It is difficult to find similar businesses and it is almost impossible to get access to real numbers. The negative side of the cost method is that it does not take into account the value of intellectual property, the “burning eyes” of the team, and other intangibles. But at the initial stage, the further success of the project depends on them. In practice, the income method provides the most reliable data for a startup. But here, too, you need to understand that none of the approaches gives an objective assessment if we are talking about a start-up business in IT. It is impossible to make long-term forecasts for startups, since sometimes projects undergo major changes in their business processes in the first year of their existence.

Danila Nekrylov, analyst at Bright Capital:

Traditional approaches to company valuation (comparative, costly, profitable) are practically not used to determine the pre-money valuation of a venture project. This is due to a high degree of uncertainty regarding the future cash flows of the project, often the absence of analogous companies in Russia and in the world. And the assessment of the project at its liquidation value often leads to such a figure that it makes no sense for the founder to continue the project in the future.

In the venture capital business, project valuation is the result of negotiations between the founder of the company and investors. Often, a venture capital fund makes an assessment of a project based on its previous experience of investing in projects of the same development stage.

If, suppose, in one venture project for $ 1 million an investor received 30%, and you can only assume 10% for the exact same amount, then the investor will have many questions as to why your project is better than its analogue.

Also, the following scheme is used as the definition of the project evaluation range:

• A venture fund determines a "comfortable" share for it in an investment project, usually it lies in the range of 15-45% and depends on the stage of the project and the availability of other investors. As a rule, funds are not interested in control.
• Accordingly, if the investor does not receive his comfortable share in the project for the amount of investment required by the project, this will serve as the beginning of long negotiations. There are two variables in this model - the size of the investment and the pre-investment assessment of the project by the founders themselves.

In preparing the article, materials of the educational program for professional private investors Ready for Equity were used

At the present stage of development of the business market and the world economy, the assessment of intangible assets and intellectual property has become no less important than tangible ones. The role of objective analysis and accurate determination of business value has increased. This procedure is simply necessary for those who are planning to invest, buy or sell businesses. An independent assessment of the company's value in such situations becomes an important management tool that will make it possible to make the right choice, avoid many risks and get maximum profit. It will not even be able to fully function and expand without a qualitative assessment at one of the stages of development.

What is business valuation?

Business valuation is a procedure for determining the market value of an enterprise (taking into account tangible, intangible assets, financial condition, expected profit), which is carried out by official bodies or experts. Any property in combination with a package of rights to it can become an object of assessment. The meaning of the term "business valuation" is slightly different. It implies the definition in the monetary ratio of the value of the enterprise, which includes (except for assets) its utility and the costs committed to obtain it.

The main purpose of the appraisal is to establish the market value of the assets being appraised for the client. The customer initiates a business assessment, as a rule, in the case of the sale or purchase of a company, equity interest, lending, project financing, improving the efficiency of enterprise management, etc. Situations often arise when several reasons combine.

When do you need a business valuation?

An increase in the value of a business is one of the important indicators of the growth of its profitability, a decrease indicates the need for changes in the management system and development strategy. Both the owner of the business and a third party may be interested in conducting an objective assessment.

The cost of an enterprise is determined when:

• assessment of management efficiency;
• corporatization;
• reorganization;
• use of mortgage lending;
• taxation in inheritance, donation;
• participation in the activities of the stock market;
• assessment of the allocated business shares in case of a merger in the form of consolidation and expansion;
• partial or complete liquidation;
• issue of new shares, etc.

A business assessment may be needed not only by a potential investor or business owner, but also by other market participants, for example, insurance companies (to determine the amount of risk, confirm compliance with the risk sharing agreement between the client and the insured), credit institutions (to assess solvency, determine the optimal amount of maximum credit), as well as government agencies, shareholders, suppliers, manufacturers, intermediaries. The final result of the assessment can be presented in one report in several sections or in two different documents. The assessment of the enterprise is carried out in accordance with the set goal, which is formulated by the customer when drawing up the Agreement and the Assignment for the assessment. They must necessarily comply with the Federal Law "On appraisal activities in the Russian Federation", the provisions of the "National Code of Ethics for Appraisers of the Russian Federation" and Federal Appraisal Standards.

Business valuation methods

Before investing or purchasing a business, the buyer first of all evaluates its usefulness for himself. It must match his individual income needs. It is the latter indicator, taking into account the costs, that is the basis of the market value that the appraiser calculates. The principles, methods and approaches to its definition are chosen based on the specifics of the business as a "product": investment (money is invested in it, expecting a profit in the future), consistency (it can be sold as a system or separate elements), need (depends on the situation inside production and in the external environment). The appraisal process consists of several stages performed by a specialist appraiser to objectively determine the value of the business:

• conclusion of an appraisal agreement with the customer;
• determination of the characteristics of the object of assessment;
• market analysis;
• selection of assessment methods, calculations;
• generalization of the results obtained within the framework of each of the approaches, determination of the final value of the object's value;
• preparation and transmission of the report to the customer.

At the fourth stage, the appraiser chooses one or more optimal approaches to assessing the enterprise, which will be most effective in a particular situation. Business valuation methods are universal, but they are selected individually in each situation.

Costly

This approach implies a set of methods for assessing the value of an object, which are aimed at determining the costs required to restore, replace an enterprise, taking into account costs, equipment wear and other factors. It allows you to track the absolute changes in the balance sheet with its possible adjustment as of the valuation date (in the opinion of an independent expert appraiser) - using data on current market prices for labor, materials and other costs.

Profitable

Income approach means a set of methods for assessing the value of an object, which are based on determining the amount of expected income from the business. In this case, income is the key factor determining the value of the object. The larger it is, the higher its market value. Here, experts apply the estimated principle of expectation, taking into account the period of receipt of potential income according to the plan, the number and degree of risks. For the analysis, capitalization ratios are used, which are calculated based on market data. This method of assessment is considered the most effective and convenient for determining the value of a business (only in some cases comparative or costly are more accurate). The approach is best used if the company's revenues are stable.

Comparative

A comparative method for determining the value of an enterprise means a complex of valuation methods that are based on comparing the object of valuation with competing objects (with similar characteristics, the availability of information on transaction prices). Experts believe that it is he who gives the most accurate results (of course, subject to the active work of the market with similar properties in terms of parameters). For this approach, market data for similar objects and the method of capital market, transactions and industry ratios (with elements - benchmarking analysis) are used.

Important: it is worth noting that each approach makes it possible to emphasize and objectively analyze certain characteristics of the object of assessment, but they are all interrelated.

How to evaluate the value of a business?

Business and other objects are appraised by specialized companies. To assess the value of the enterprise, you need to contact the specialists, clearly indicate the purpose of determining the value and sign the Agreement. According to the Decree of the Government of the Russian Federation of December 2007 No. 60, the assessment process should take place in several stages:

1. Definition of the object (description, rights to it, date and base of assessment, limiting conditions).
2. Conclusion of an assessment agreement (identification and preliminary inspection of an object, selection of the type, sources of the required data, personnel selection, development of an assessment plan, drawing up and conclusion of an agreement, payment for services).
3. Determination of the characteristics of the object (collection and verification of data, determination of external and internal information).
4. Market analysis (includes analysis of financial ratios, reports, adjustments to financial statements for valuation purposes).
5. The choice of methods within the framework of a specific approach (or several), carrying out the necessary calculations.
6. Generalization of the results, determination of the final cost of the object.
7. Drawing up and transferring the report to the customer.

Choosing an appraisal company

The appraisal company is the organizer of the appraisal project, helps the appraiser in his professional activities, provides marketing, financial and informational support. It provides services not only to business owners, but also to legal entities, financial institutions (most often banks), insurance companies and government agencies. As a rule, the property owner pays for the appraisal services, but often the other party puts forward certain requirements regarding the appraisal company. When choosing an appraisal company, it is necessary to collect as much objective information about it as possible and make sure of its competence and professionalism. Particular attention should be paid to the following factors:

• term of work in the market;
• customer reviews;
• business reputation;
• position in the ratings of independent specialized agencies and publications (but it is important to pay attention to the rating criteria, it should be formed from generalized indicators; you can use the data, for example, from the banki.ru resource, which reflect the degree of customer satisfaction with the services of different banks, and see which rating they cooperate with companies);
• documents (Certificate of state registration of a legal entity, copies or scans of constituent documents, etc.);
• awards, certificates, diplomas;
• the amount of liability insurance (the higher it is, the safer for the customer).

The appraisal company must prove itself as an organization that produces correct results and offers the services of objective experts, not motivated by a third party.

Submission of the necessary papers

To start the assessment process, the business owner must provide a package of documents. Its position depends on the purpose of the conduct, the form of ownership and the criteria for the formation of the assessment. Many appraisal companies have launched websites where you can apply online or by phone (but you only need to submit documents in person). The basic package includes the following papers:

1. Registration Certificate or Articles of Association.
2. For joint stock companies - reports on the results of the issue of securities, an extract from the register of shareholders.
3. Documents showing the organizational structure and activities of the facility.
4. Financial statements for the last 3-5 years, sometimes an additional explanation is needed on some balance sheet items.
5. Copies of patents, licenses.
6. If necessary - documents confirming the ownership of real estate.

Advice: It is important to take into account that each appraisal company has its own methodology of work. Sometimes, in addition to the basic set of documents, additional papers are required from the customer, for example, a development plan for the next few years, drawing up an investment project, an auditor's opinion, an explanatory note from the owner describing the company and indicating the number of staff.

Valuation Model Harmonization

The dynamic economic situation in the country and the world becomes the reason that for each assessment it is necessary to develop an individual model. The study of the same object is rarely repeated, but in this case it is impossible to reproduce the same assessment. As a base, the evaluators use generally accepted models. Their choice must be coordinated with the client based on the goals and tasks of the project. The optimal model should take into account not only the financial aspect, but also help in assessing the level of corporate governance, have the potential and act as an independent method for assessing the value of a business.

Basic business valuation models:

1. Economic value added (EVA).
2. Market value added (MVA).
3. Shareholder value added (SVA).
4. Total shareholder return (TSR).
5. Added cash flow (Сash value added - CVA).

Getting a report with the results

Business valuation - example

A business valuation report can be submitted both in text format and in the form of tables or with their active use. For example, consider the valuation of an enterprise using the net asset value method (cost approach). It is most often used if the company has significant tangible assets (or very few of them), the percentage of total costs in the cost of the product or service is insignificant, in recent years the cash flow has been subject to significant fluctuations and if the company does not have fully depreciated assets, which are currently generate income.

Let's consider an example based on the table:

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Business appraisal is necessary not only for conducting sale and purchase transactions, calculating the collateral value, but also for other purposes, for example, to determine the effectiveness of management. In the course of completing the assigned task, the expert takes into account, in addition to the costs of setting up an enterprise, market factors that can affect the cost, and also uses technological, organizational and financial analyzes. Valuation activity is an essential part of any developed country, because the results of valuation become the basis for making important economic and managerial decisions in the private and public sector.

In contact with

The structure of liabilities taken into account includes:

• The article of the third section of the balance sheet - targeted financing and receipts;
• Long-term liabilities on loans and credits and other long-term liabilities (the fourth section of the balance sheet);
• Articles of the fifth section of the balance sheet - short-term liabilities on loans and credits; accounts payable; indebtedness to participants (founders) for the payment of income; reserves for future expenses; other short-term liabilities.

2. Income approach

An enterprise business valuation using the income approach is carried out on the basis of company revenues, those economic benefits that the owner receives from owning the enterprise.

The valuation is based on the principle that a potential buyer will not pay more for a stake in an enterprise than it can generate income in the future.

The assessment of the future income of the enterprise is made taking into account the factor of the change in the value of money over time - the income received at the present time has a greater value for the investor than the same income that will be received in the future.

The total cost of the enterprise is calculated as the sum of income streams from business activities in the forecast period, reduced to the current price level, plus the value of the business in the post-forecast period.

Within the framework of the income approach, two valuation methods are mainly used:

• direct capitalization method;
• the method of discounting the estimated income streams.

2.1. Direct capitalization method

The income approach views the business as a long-term asset, generating a certain income for the business owner... The direct capitalization method identifies a business with a financial asset of a certain kind - perpetual annuity. The features of this asset are:

• unlimited life span;
• stability of cash flow (equal annual amounts or annual amounts increasing at a constant rate).

2.2. Discount method of estimated cash flows of income

This method of the income approach is used to assess enterprises that are in the stage of intensive business development, to evaluate companies for which there is no reason to assume an unlimited life span. The life of a business can be limited by lease agreements, falling demand for manufactured products, etc.

Under the discounted cash flow method, the enterprise value is based on future projected income streams.

For ready-made businesses duration of the forecast period corresponds to the remaining effective life of the enterprise and reflects the ability to predict the timing of income from business activities with a reasonable degree of probability of their receipt, without additional, significant financial investments in the estimated business.

The remaining effective predicted life span may be limited by the economic life of the product, the economic life of the product, the moral and physical deterioration of equipment and production technologies, the terms of the lease of production and office space, the prospects of the market in which the evaluated business operates.

A number of factors influence the value of the risk of earning income in the direction of increase or decrease. Taking into account the risks of investing in a business when determining the value of an enterprise using an income approach is carried out by selecting an adequate capitalization rate or discount used to determine the current value of the cash flows expected from the business.

The discount rate is the factor used to convert future payments or receipts to present value. That is, the discount rate is used to determine the amount that an investor would pay today for an investment asset in order to receive income in the future.

3. Assessment of business value using a comparative approach

A comparative approach to business valuation assumes that its value is determined by how much it costs can be sold if there is a sufficiently formed market. In other words, the most probable value of the estimated business can be the real selling price of a similar enterprise, fixed by the market.

The main advantage of the comparative approach is that the appraiser is guided by the actual purchase and sale prices of similar enterprises, the method really reflects the supply and demand for the given object of appraisal, since the price of the actually completed transaction takes into account the situation on the sales market for ready-made businesses as much as possible.

To determine the value of an enterprise using a comparative approach, reliable market information on sale and purchase transactions of ready-made businesses and reliable financial information on sold businesses are required. This information is not available on the market.

Comparative sales valuation has its limitations. The comparative approach to the assessment does not take into account the prospects for the development of the assessed business, according to this approach, it is advisable to assess enterprises that have reached stable profits, and in relation to which it can be assumed that in the actually forecasted future their activities will not be terminated

4. Assessment of business value by the method of rules of thumb

Rules of thumb allow you to look from the inside at the problems of the value of an enterprise, company or share in it, as well as issues of business support and reliability. However, value data obtained using rules of thumb should only play a decisive role in decision-making if they are supported by other valuation methods.

Most of the rules of thumb are percentage of gross income (sales volume, bills paid for the year, annual gross income, annual fees received, annual revenue, all of which are equal in the sense of applying rules of thumb). The adjusted annual income, if the rule of thumb is applied, corresponds to the total cash flow, including the owner's salary and the net profit of the business itself. In other words, it is the amount of revised, normalized income, often referred to as the seller's discretionary income or company cash.

The estimates of the business of an enterprise obtained by the above methods may vary. The final element of the assessment process is comparison of ratingsobtained on the basis of these methods, and the reduction of the obtained cost estimates to a single cost of the object. The reconciliation process takes into account the strengths and weaknesses of each method, determines how they adequately reflect the objective state of the market. The final market value of the enterprise is calculated as a weighted average.

The process of convergence of estimates leads to the establishment of the final cost of the object, which achieves the purpose of the valuation.

On our website you can see examples of our work on enterprise appraisaland also with the procedure for ordering and performing this work ... Read about the possibilities cost optimization for this service in our article "The cost of conducting a business valuation" .
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