home Business blog Combined methods of business valuation. Approaches to business valuation

Combined methods of business valuation. Approaches to business valuation

Assessing the value of a business is a rather complex and expensive procedure, but sometimes it becomes the only right step before making strategically important decisions. When there is a need to evaluate a business, what valuation methods exist, and how to benefit from the evaluation maximum benefit for business, you will find out 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 and land, what should you prioritize? That's right - you look through advertisements for the sale of similar houses in selected areas in order to “price 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:

Net assets - the amount of expenses that you or the owner of the house incurred for purchase and construction, repair and improvement.
Market expectations are the amount that buyers on the market are willing to pay for a similar property today.
Own expectations (investment expectations) - the amount at which you or the buyer evaluate the future benefits of purchasing the property. This could be the benefits of using it yourself, spending time with your grandchildren on holiday, or the health benefits of growing your own crops. Or it could be the investment benefit of buying a home if you plan to rent it out and/or sell it when the price rises.

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

When there is a need to evaluate 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 required to conduct a business assessment in the following cases:

When making transactions involving property Russian Federation, that is, if one of the parties to the purchase and sale transaction, lease or privatization is the state.
If disputes arise about the value of property. If a business segment, a property complex or the entire business is the subject of a pledge. Or if you have a dispute with the tax office about the correct calculation of the tax base.
When making a non-monetary contribution to the authorized capital, the share in the capital of the enterprise cannot be determined without the involvement of an appraiser.
When transferring an enterprise or property complex into a mortgage.
When mortgaging an enterprise or property complex.
When a joint stock company repurchases its shares at the request of shareholders. Shares must be purchased at a price not lower than the market price - the price is determined by an independent appraiser.
In case of bankruptcy of an enterprise. The manager can begin selling the property only after completing the assessment.

Those who voluntarily evaluate a business are:

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 something that he cannot “touch”. Cm.,
compares the investment attractiveness of a new project in an existing or new business with other investment methods 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 only be determined by understanding the initial price of the aggregate of assets that you want to sell ( trademark, business processes, image, contracts with suppliers, etc.);
wishes to improve the quality of management existing business, including carrying out restructuring, getting rid of unprofitable assets, identifying assets whose potential has not been 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. With results in hand independent assessment, the borrower may require more profitable terms for loans (see also, insures the property complex;
transfers the rights to use intangible assets on a licensing basis;
assesses damage from violations in the field of use of intangible assets. Valuation documents will be indispensable arguments in court, since the offender will be required to pay the amount of proven damage and lost profits;
plans to benefit from for tax optimization purposes;
conducts voluntary liquidation business.

Why is an assessment needed? We’ve decided. Let's move on to the section: How to value a business?

Business valuation methods

Let's return to the analogy of buying a house. There are three ways to evaluate a house:

The comparative method is to compare the prices of similar houses on the market.
The cost-effective method is to calculate how much money you will need to buy the same land and build the same house yourself.
The income method is to predict how much value the purchase of this home will bring in the future.

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

Business valuation methodology that will suit the owner

The business valuation method must be chosen based on the specific goals of the owner. Look - five ways to assess the value of a business in case the owner buys or sells:

a company whose shares are publicly traded;

share to society;

operating business;

additional infrastructure for your own business;

organization on the verge of liquidation or bankruptcy.

Comparative approach to business valuation

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

Divided into:

peer company method;
transaction method;
method of industry coefficients.

Analogue company method

The analogue company method involves selecting similar companies to the one being valued on the established stock market, and the transaction method, as a special case of the analogue company method, operates on the mergers and acquisitions market.

The assessment algorithm for these two methods is similar:

Collect information and compile a list of analogues.
Conduct a standard financial analysis of the statements of the company being evaluated and similar companies.
Multipliers are calculated for each company based on key indicators financial analysis (revenue, profit, liquidity, financial stability etc.). A multiplier is a coefficient showing the relationship between the value of a company and its key financial indicators.
By using statistical methods determine the average - the mode or median of the multipliers, which are multiplied by the financial statements of the company being evaluated.
The value of the company is calculated by coordinating the values obtained based on the use of different multipliers.

The owner of the business will do everything possible to inflate its value as much as possible when selling. But even if the time allotted for the transaction is not enough for full due diligence, financial director the purchasing enterprise has every chance of detecting a catch and insuring itself in case of fraud. It is enough to know the common and most popular techniques that sellers resort to in order to embellish the real state of affairs in the company.

Industry coefficient method

The method of industry coefficients is more widely used in Western markets, since a broader knowledge base and accumulated experience in transactions with the purchase and sale of companies by industry have been formed there. Industry coefficients are ready-made multipliers calculated for companies in a specific industry.

The industry coefficient method is suitable for express assessment of small businesses and does not require the involvement of an appraiser, since it is easy to use. For example, it is known that the MIN multiplier for monthly revenue for a store is household appliances is 1 and MAX is 2.

This means that you can sell a household appliance store whose monthly revenue is $k 2000 for a minimum of k $2000 and a maximum of k $4000.

For a restaurant, industry multipliers for annual cash flow are MIN 1 and MAX 3, which means that with an annual flow of k$15,000, the buyer will expect a cost from k$15,000 to k$45,000.

But in the realities of the post-Soviet space, the method of industry multipliers has not taken root, since there is no objective history in the business purchase and sale markets yet.

Pros of the comparative approach: the algorithm for using the method is quite simple, it is easy to check and update. Using the method does not require significant time expenditure. The business value obtained using the comparative method is already updated according to current market expectations.

Disadvantages of the comparative approach: 1. lack of information about analogue companies due to the underdevelopment of the business buying and selling market; 2. lack of expectations about the prospects in the comparative approach - both a business that is extremely profitable in the future and a business at the stage of decline are valued equally.

A ready-made model in Excel for quickly assessing the value of a business

To evaluate a business on your own in a short time, use a ready-made model in Excel. It will calculate the cost using the net profit capitalization method. A minimum of information about the company is required. Prepare a report on financial results for the three years preceding the valuation date. You will also need a few figures from the balance sheet as of the last reporting date and planned revenue for the coming year.

Cost-based approach to business valuation

The cost approach is not based on external factors existence of a business, but considers the business itself during the period of its existence. It is divided into method net assets and the liquidation 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 asset method

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

Formula for determining the value of a business using the cost approach:

It is understood that in the aggregate the business cannot be worth less than the individual assets it earned are worth, and that an informed investor will not pay more for the business than it would cost to create 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 liabilities.

To estimate the market value of each balance sheet element, you can use both the cost approach and other valuation approaches.

Example 1

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

According to the balance sheet, the cost of the equipment is 2,400 thousand rubles, the commissioning date is 01/01/2015, the initial cost is 4,200 thousand rubles.

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

Stack = St - And

The cost of reproduction of identical equipment consists of purchase, modernization, delivery and installation costs and amounts to 4,850 thousand rubles, based on 2018 prices. Replacement cost equals reproduction cost.

We calculate wear using the formula:

I= IF + IM + IE

Depreciation of equipment for the period from 01/01/2015 to 11/30/2018 was:

I = 1160 + 520 + 250 = 1,930 thousand rubles

The current cost of the equipment is 4,850 – 1,930 = 2,920 thousand rubles.

Liabilities are assessed only if there is reliable information about their market or “cost” value; in other cases, they are quoted at book value.

Example 2

Before a takeover transaction, an invited team of appraisers evaluates the target company using the net asset method. The net assets of the target company amounted to $5,500 thousand.

Company balance sheet for the current and previous year

Index	Current year, thousand dollars	Previous year, thousand dollars
Assets
Fixed assets
Intangible assets
Accounts receivable
Other current assets
Total assets
Liabilities
Borrowed funds
Accounts payable
Total liabilities
Equity

The appraisers carried out calculations and determined the current value of the assets and liabilities of the balance sheet.

Index	Current value, thousand dollars
Assets
Fixed assets
Intangible assets
Accounts receivable
Other current assets
Total assets
Liabilities
Borrowed funds
Accounts payable
Total liabilities
Equity

Liquidation value method

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

Liquidation value formula:

Slikv = Stack * (1 - Sq.pr) - Zprod

Example 3

The company decided to liquidate the warehouse complex, consisting of a building, the land underneath it, warehouse equipment, and machinery. The current value of the complex, determined using the net asset method, was $8,750 thousand, but as a result of the assessment it was determined that some of the equipment was very obsolete (85%) and it was not possible to find a buyer for it in a short time. That's why this equipment it was decided to dispose of it. The equipment stack is 340 thousand dollars, disposal costs are 32 thousand dollars. The exposure period was accepted 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 value will be:

Slikv = (8750 – 340 - 32)*(1-0.3) – 45 = 5,820 thousand dollars.

Pros of the cost approach: The use of a 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 approach is that its implementation does not require information about analogues, which greatly simplifies the assessment in opaque markets.

Disadvantages of the cost approach: large costs 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 quickly became outdated. The costs are high, the market value is zero), and from the prospects for business development (high-tech startups are worth nothing according to the cost approach).

Determining the fair value of a non-public company is more difficult. Undoubtedly, the ability of a business to generate income here too most important factor cost, but for the minority owner of a non-public company, the ability to provide a return on invested capital is no less important. If the value 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 the decisive factor in determining the price of a non-public business. No less significant than the business’s ability to generate income itself.

Income approach to business valuation

This is a favorite approach of all investors and businessmen because each method views investments as a tool for making profits in the future, and not as a way to acquire worthless 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:

Income capitalization method;
Discounted cash flow method.

Income capitalization method

The simplest of the two methods is based on the assumption that the business is developing steadily and will generate roughly the same income over the medium to long term.

According to the income capitalization method, the value of a business (share in a business) is equal to the normalized annual profitability divided by the capitalization rate, i.e., calculated by the formula:

Normalized profit can be selected from:

net profit of the business for the last year;
estimated profit for the first subsequent year;
dividends for the past year;
calculated dividends for the next year;
the same values averaged over the past 3–5 years.

The capitalization rate, in turn, is determined as the profitability of alternative investments according to the formula:

Example 4

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

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

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

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

Advantages of the capitalization method income- its simplicity. Among the minuses– failure to account for fluctuations in cash flows from period to period and failure to take into account the cost of liquidating the project at the end of its life.

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

Discounted Cash Flow Method

Based on constructing a cash flow model by period and determining the discounted balance of cash flows.

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

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

In order to fill the model with revenue and cost figures, a retrospective analysis of the business is carried out, market expectations, competition, and available production capacity are assessed. Mathematical models for constructing 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 value is not zero, but one of the following:

liquidation, if it is planned to close the business;
net asset value if sold;
cost according to the Gordon model, if you plan to continue the business and derive constant income from it. See also how to use the Gordon model to value assets.

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

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

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

To calculate the value of a business using the discounted cash flow method, the NPV indicator is used.

Example 5

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

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

Financial model:

Index
Index	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 = 2510 thousand dollars

The business value was calculated:

NPV = -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 = 6836 thousand dollars

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

Disadvantages of the income approach: this method is the most subjective of all possible, because forecasts for the future are made with a large degree of uncertainty, and here the position of the appraiser (optimistic or pessimistic) plays an important role. 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.

The benefits of using different approaches to assessing the value of a business

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

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

Therefore, never agree to an appraiser or business partner’s proposal to value a part or the entire business using only one of the approaches. Compare alternatives and look for the more profitable one.

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

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

Basically, there are three methods for determining the value of an enterprise (business): cost-based, comparative and profitable.

In the practice of operations with the valuation of enterprises, the most common various situations. Moreover, each class of situations has its own approaches and methods that are adequate only to it. For the right choice methods, it is necessary to first classify valuation situations using the grouping of objects, the type of transaction, the moment at which the valuation is made, etc. Moreover, if tens or hundreds of homogeneous objects are traded on the market, it is advisable to use comparative method. For the evaluation of complex and unique objects, the cost method is preferable.

Certain types of businesses are typically assessed based on their business potential (for example, a gas station or a hotel). The volume of gasoline sales and the number of hotel guests are sources of income, which, after comparison with the cost of operating expenses, allows us to determine profitability of this enterprise. This approach to valuation is called income. The income method is based on capitalization or discounting of the profit that will be received if the property is rented out. The valuation result using this method includes both the cost of the building and the cost of the land.

If the enterprise (business) is not bought or sold and there is no developed market of this business When income considerations are not the basis for investment (hospitals, government buildings), valuation can be made on the basis of determining the cost of construction, taking into account depreciation and adding the cost of replacing wear and tear, i.e. using the cost method.

In the case where there is a market for a business similar to the one being valued, a comparative or market method can be used to determine the market value, based on the selection of comparable objects that have already been sold in this market.

In an ideal market, all three approaches should result in the same amount of value. However, most markets are imperfect, potential users may be misinformed, and producers may be inefficient. For these, as well as other reasons, these approaches may yield different cost indicators.

Each of the three named approaches involves the use of its own methods in work.

The income approach involves the use of:

- capitalization method. The method is applied to those enterprises that have managed to accumulate assets as a result of their capitalization in previous periods; in other words, this method is most adequate for assessing enterprises that are “mature” in terms of their age.
-discounted cash flow method. The method is focused on assessing the enterprise as an operating one, which expects to continue to function. It is more applicable to the assessment of young enterprises that have not managed to earn enough profits to capitalize on additional assets, but which, nevertheless; have a promising product and have obvious competitive advantages compared to existing and potential competitors.

The cost approach uses:

-net asset method. The method is applicable when an investor intends to close an enterprise or significantly reduce its output.
- liquidation value method.

The comparative approach uses:

- capital market method. The method is focused on assessing the enterprise as an operating one, which expects to continue to function.
-transaction method. The method is applicable when an investor intends to close an enterprise or significantly reduce its output.
-method of industry coefficients. The method is focused on assessing the enterprise as an operating one, which expects to continue to function.

The capital market, transaction and industry ratio methods are suitable provided that the peer enterprise is strictly selected, which must be of the same type as the enterprise being valued.

The possibility, and even in many cases the need (to obtain a more reliable result), to apply different methods of business valuation to the valuation of an enterprise in a specific investment situation leads to a very simple idea of “weighting” the estimates calculated according to different methods, and summation of such “weighted” estimates. In this case, the weighting coefficients of the significance of estimates for different, in principle acceptable in a given situation, evaluation methods are understood as coefficients of confidence in the corresponding method. These coefficients are purely expert (determined by the appraiser independently).

The final assessment of the value of an enterprise (business) can be determined by the formula:

where V i is an assessment of the value of the enterprise (business) i-th method(all applicable assessment methods are randomly numbered);

i = 1,..., n - set of assessment methods applicable in this case;

Z i -- weighting coefficient of method number i.

It is obvious that the reasonable setting of Z coefficients is one of the main evidence of the sufficient qualifications and impartiality of the business appraiser.

When assessing Russian enterprises The date of the assessment is of particular importance. Linking the valuation to time is especially important when, on the one hand, the market is oversaturated with property in a pre-bankruptcy state, and on the other hand, there is a lack of investment resources.

For Russian economy characterized by an excess of the supply of all assets, including real estate, over effective demand. This imbalance in supply directly affects the expected value of the property offered for sale. The price of property in a balanced market is not the same as the price in a depressed market. But property owners and investors are interested in the real price that will be offered on a specific market, at a specific moment and under specific conditions. Buyers want to reduce the likelihood of losing their money and require certain guarantees. Therefore, when determining the price of an enterprise, it is necessary to take into account all risk factors, including the risk of inflation and bankruptcy.

At first glance, in an inflationary economy, the method of current value of the enterprise (discounted cash flow method) is most suitable for valuing an enterprise, since the percentage of inflation is taken into account in the discount rate. This would be correct if inflation rates are predictable and the economy is functioning normally. It is very difficult to predict the flow of net income from the activities of an enterprise for several years in advance in an unstable economy.

Income capitalization method– business valuation approach or investment project based on reducing income to a single value. The method is used for express assessment of the value of business, investment projects and real estate, as well as for making comparisons to determine more investment-attractive objects. In this article we will focus on analyzing the method of capitalizing income for valuing a business or an existing investment project.

Advantages and disadvantages of the income capitalization method

Let's look at the advantages and disadvantages of the business valuation method based on the capitalization of its income in the table below ↓.

Advantages

Flaws

Allows you to compare the investment attractiveness of a business or investment project based on income

Ease of calculation

Suitable for developed large companies that have sufficient financial data to accurately forecast future earnings and growth rates

It is applicable for a stable operating enterprise (business), when it is possible to correctly predict future cash receipts and income.

Not suitable for evaluating venture projects and startups that have no cash flows at all and have not yet created a stable sales network and uniform income streams

The objects of assessment are undergoing modernization and reconstruction

Not suitable for valuing a business with losses

Not suitable for valuing a business with active reinvestment and variable growth rates

Due to the fact that in practice it is difficult to obtain constant financial data, therefore, the discounted cash flow method is often used in valuation.

It should be noted that the income capitalization method for business valuation is a variation of the cash flow discounting method with the condition that the income growth rate is constant.

Formula for calculating the value of a company using the capitalization method

The formula for calculating income capitalization is as follows:

V ( Englishvalue) – business (project) cost;

I( Englishincome) - income;

R – capitalization rate.

The table below describes in more detail how to calculate model indicators ↓.

Model indicator	Description	Measurement	Features of application
	Business cost		Shows the market value of the company's assets
	Income		Calculated based on the indicators of the financial results statement (form No. 2). Income can be of the following types: · Revenue from sales of products/services · Company net profit (line 2400) · Profit before taxes (line 2300) · Amount of dividend payments Cash flow These indicators are taken as of the current valuation date if they have changed significantly over the past recent years, then averaged over several years (3-5 years)
	Capitalization rate		It is necessary to determine the method for calculating the coefficient. It depends on what period of data the calculation will be for (based on retrospective or forecast income data)

As can be seen from the table, to carry out the assessment it is necessary to determine what income will be chosen for capitalization: net profit, profit before taxes or profit from dividend payments. The next step is to select a method for calculating the capitalization rate and obtain its estimate.

What type of income should I choose for assessment?

The choice of one type of income or another depends on what other business is being compared with and what financial statements are available. If enterprises only have

sales revenue, then this indicator is taken as the capitalized base. It can be noted that the assessment can be used different kinds data ↓.

Data type	Direction of application
Retrospective data (historical)	To evaluate existing companies with financial statements going back several years. Are used historical meanings income (net profit) of the enterprise for past periods (3-7 years). The data is averaged and adjusted for current inflation.
Forecast data	It is used to assess the future value of an investment project and its investment attractiveness. Historical data is used to predict future profit values. The forecast depth is usually 1-3 years.
Combining historical and forecast data	Used to assess the investment attractiveness of an enterprise. Both retrospective and forecast data are used.

What income indicator should be used in the model to calculate the base?

Let's consider what income indicators are chosen to evaluate a business.

Revenue It is usually used to evaluate enterprises in the service sector.

Net profit used to evaluate large companies.

Profit before taxes it is applied for small businesses to exclude the influence of federal and regional benefits and subsidies in income generation.

Income in the form of dividend payments are used to value a company with ordinary shares on the stock market.

Cash flows are used to calculate the capitalized base for companies that are dominated by fixed assets. In this case, only the flow from equity capital or investment capital (own + borrowed) can be used.

After choosing income, it is necessary to adjust it - to current prices; for this, changes in the value of consumer prices from Rosstat statistics can be used, and it is also necessary to exclude income and expenses from assets that were one-time in nature and will not be repeated in the future.

Income/expenses received from the sale/purchase of a fixed asset.
Non-operating income/expenses: insurance payments, losses from production freezes, fines and penalties for lawsuits, etc.
Income from assets not related to the main activities of the company.

Methods for calculating the capitalization rate

Capitalization rate is the current rate of return on a business's capital. The capitalization rate represents the value of capital (property) at the time of valuation.

Calculation using the market extraction method

This method is used to calculate the value of a business based on existing transactions on the market for the sale/purchase of the same types of business. In this case, it is necessary to know the income indicators of the businesses or projects being sold. The method is used for a replicated business, for example, a franchise.

The capitalization ratio is calculated using the following formula:

R – capitalization rate;

V – company value;

I ai – the amount of income created i-th company analogue;

V ai – sales price for market i companies;

n – number of similar companies.

Calculating the ratio as the average market price of sold companies is a rather labor-intensive process and there may often be a lack of financial data on the income or volume of transactions of similar enterprises. The second method of calculation based on the discount rate is more common in practice.

Calculation method for determining the capitalization rate

Using this method it is necessary to calculate the discount rate. The capitalization ratio will be equal to the difference between the rate of profit and the average growth rate of income (net profit). For more information about methods for calculating the discount rate, read the article: → "". The calculation formulas are as follows:

Formula No. 1

Formula No. 2*

R – capitalization rate;

based on projected profitability);

R – capitalization rate;

r – discount rate (rate of return);

g – the projected average growth rate of the company’s income ( based on historical income data).

*you can notice that the second formula corresponds to.

Most often applicable following methods discount rate estimates:

(CAPM, Sharpe model) and its modifications.
Cumulative construction method.

What is the difference between capitalization rate and discount rate?

The table below shows the differences between the concepts of discount rate and capitalization rate ↓.

An example of calculating the value of a company in Excel for KAMAZ PJSC

For practice, let’s look at estimating the value of KAMAZ PJSC in Excel. To do this you need to get financial statements operation of the enterprise over the past few years. To do this, you can go to the official website of the company. Let's take 2015 Q1 and Q2. Due to the fact that net profit has high volatility, we take the change in the company’s revenue and determine the average rate of its growth.

Rate of change in revenue (g) = LN(C6/B6)

Average revenue = AVERAGE(B6:C6)

The next step is to calculate the discount rate. Since KAMAZ PJSC does not have sufficiently volatile shares on the stock market, the cumulative valuation method can be used to calculate the discount rate. To do this, it is necessary to assess risks in the following areas ⇓.

Type of risk	Evaluation interval, %	Risk parameters	Value of assessment for the enterprise, %	Explanation of the assessment
Risk free rate *		Yield on OFZ bonds of the Central Bank of the Russian Federation	8,5	–
Key figure, quality and depth of management		Distribution management decisions		The management structure is distributed among 11 members of the board of directors
Enterprise size and market competition		Assessment of the size of the enterprise (micro, medium, large) and the characteristic impact of competitive risk on the market		KAMAZ PJSC is one of the largest and strategic enterprises, the level of competition risk is low
Financial analysis of the company		Assessment of the financial condition of the enterprise and the structure of borrowed and equity funds		The financial condition of the enterprise is not stable: a high share of state support (subsidies), a high share of borrowed capital, revenue is uneven
Product and territorial diversification		Assessment of product range and distribution network		The company has contracts with international partners, operates both regionally and international market. Wide range of products
Diversification of clientele (market volume)		Assessment of market demand for manufactured products, quantity potential clients and market size		Developed both corporate and consumer segment consumption
Profit sustainability		Assessment of factors generating revenue and net profit of an enterprise. Predicting the direction of change		There has been a positive growth trend in net profit over the past 4 years. Profit flow is uneven. High percentage change in profit
∑ Total discount rate:

*risk-free interest rate is taken as the yield on government OFZ bonds (see → change in yield) or the yield on highly reliable deposits in Sberbank PJSC with an A3 credit rating.

Capitalization rate = discount rate – average growth rate

Capitalization rate = 18-15 = 3%

Company value = D6/C8

The company's value was 486,508,123 thousand rubles.

The figure below shows the main indicators for assessing the value of a company ⇓.

conclusions

The income capitalization method is used to value companies with stable cash flows over a period of 5 or more years. In a situation high competition Company profits are highly volatile, which makes it difficult to adequately apply this method. Also, the approach has many adjustments to income and expert decisions in assessing risks, which makes it subjective in decision making. The method is most accurate when assessing the market capitalization ratio and company value in comparison with similar ones.

Business valuation and its goals

Entrepreneurial activity based on the production of products and services comes down to obtaining the maximum possible profit in constantly changing market conditions. In addition to creating economic benefits, enterprises can provide services for sales, storage and their sale to the end consumer.

The real sector of the economy, which is formed from enterprises in various industries, is the basis for the stability of the national economic system. Business connects the state and the population. At the same time, it provides large cash revenues to the budget, and also meets the needs of society for certain products and services.

The object itself economic activity may be the subject of transactions. Even for its own owner, an enterprise is primarily a means of investment, with subsequent returns.

The entrepreneur may face different tasks, requiring him to know about the real value of his own company. Among them are:

preparation for the sale of the enterprise in case of bankruptcy;
pricing for the issue of securities;
collection of data for calculating insurance premiums and payments;
business lending;
non-cash settlements with other companies;
making management decisions based on mathematical and statistical calculations;
determination of the strategic and tactical activities of the object.

Modern market conditions require the entrepreneur to make informed decisions. Conducting a business assessment allows you to identify and eliminate weaknesses in the activities of the enterprise. Besides, appraisal activity covers more than just data accounting, but also determines the influence of market factors on the object, thereby calculating the exact final results.

Business valuation methods

A third-party expert or company is usually hired to evaluate a business to ensure independence of opinion and absence of bias in the work performed. There are several fundamental approaches to calculating the value of a company. Let's look at each of them:

If the company has gone bankrupt, is at the stage of liquidation, or its profitability is negative, the cost method of calculation is used. It is based on determining the value of all assets and liabilities of the enterprise, and the value is calculated as the difference between them. Data on basic and revolving funds, the cost of marketable products according to accounting data or at the average market value. The calculation includes long term investment and deposits in bills of exchange.
A method based on calculating the amount of income and benefits brought by an object is called income. It is based on two approaches when capitalization is calculated, or the value of cash flows taking into account their discounting. The assessment considers financial condition enterprise at the current moment, as well as the value of its property complex. As a rule, the essence of the method comes down to making a forecast of income for future periods. It allows you to determine the current state of the enterprise and its development trends.
The comparative method is based on comparing the value of a company with similar enterprises on the market, taking into account their property. In practice, it is quite difficult to obtain accurate data, since market information about competitors may be unavailable or distorted. In addition, competition forces entrepreneurs to act outside the box, which in turn shapes the specifics of each business. In this case, comparison becomes ineffective.

Note 1

All of these methods have their weaknesses and strengths. Often the assessment is carried out using comprehensive analysis economic activity of an object, including several methods at once.

Business valuation formulas

After the appraiser completes the collection of information about the object under study and decides on the choice of assessment methods, he proceeds to mathematical calculations. To determine the value of an enterprise, depending on the chosen methods, different calculation formulas are used.

Factor analysis of an enterprise can be carried out using the DuPont method, implemented in the financial analysis company of the same name. The essence of the calculation comes down to determining the efficiency of the enterprise in the market, that is, determining its profitability taking into account various factors. The profitability indicator allows you to determine the development trends of the company and calculate its future profitability. The convenience of this model lies in its simplicity. There is a two-factor, three-factor and five-factor calculation model. The formula for the five-factor model is given below:

Figure 1. Formula of the five-factor model. Author24 - online exchange of student works

where $TB$ is the tax coefficient, $IB$ is the interest coefficient, $ROS$ is the return on sales, $Koa$ is the turnover ratio, $LR$ is the capitalization ratio.

Note 2

The disadvantage of the calculation is that accounting data is not always accurate.

Business growth trends can be determined by the formula:

$DC = DC_1 / (1 + r)_1 + DC_2 / (1+r)_2 + ... + DC_n / (1+r)_n$, where

$DC$ is the cost of capital by year $i$.

$r = r (1 –T) L / (L + E) + dE / (L+E)$ , where

$r$ - loan rate, $T$ - income tax, $L$ - bank loans, $E$ - capital, $d$ - interest on dividends.

Then the trends in changes in the cost of capital can be calculated using the formula:

$DC = (Pik – r) E$

where $Pik$ is return on capital.

One of important indicators The calculation is the goodwill of the business. This value is important for trade and services. It shows by what amount the value of the entire business exceeds the value of tangible assets.

Goodwill = Business valuation for sale – Business valuation not for sale

That is, it is determined by the price that the buyer is willing to pay in excess of the value of his assets according to market data.

If the capitalization method is used, the calculation is made according to the formula:

Cost = Profit / Capitalization Rate

If a multiplier or value ratio is used, obtained by comparison with similar companies, then the value will be calculated as:

Cost = Profit $\cdot$ Multiplier

Multiplier = 1 / Capitalization rate

In practice, the Gordon model is often used to calculate the value of a company and its investment attractiveness. The essence of the formula comes down to forecasting discounted cash flows in long term height:

$FV = CF(n + 1) / (DR - t)$, where

$FV$ – enterprise value in the future period, $CF(n + 1)$ – cash flow at the beginning of the billing period, $DR$ – discount factor, $T$ – long-term trends in income growth

Note 3

However, such a formula can only be applied in conditions of stability of the country's economy.

From this article you will learn:

What is company value and why is it needed?

What types of company value are there?

How to calculate the value of a company

How to quickly calculate the value of a company

What are the features of company value management?

How to increase company value

A business exists not only to receive funds for the goods or services for 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, there is often a need to assess the value of the company before selling it. In this article we will talk about how to understand everything related to the value of your business and avoid difficulties.

Why is it necessary to know the value of a company?

Now the overwhelming majority of companies in Russia do not consider assessing the value of a company to be something necessary, and their owners often do not see the point in this until the business reaches high speeds and the public arena. Until then, the assessment is perceived as a reason for the owner’s personal pride.
There are actually about twenty economic goals for calculating the value of a company, but there are only three most important ones:

This provides objective data on the state of the business and the effectiveness of the management apparatus in it. By reacting to them, owners can always correct course in time.
It is impossible to approach investors for additional cash injections without information about the real value of the company, otherwise you risk not getting what you came for.
Valuation makes it possible to take into account assets arising during the course of economic activity companies.

Of course, assessing the value is necessary not only for buying or selling ready-made business. This indicator is important For strategic management company. A clear understanding of the value of your company will also be required when issuing securities, shares and entering the stock market. It is also significant that no investor will agree to invest their money where the company’s value has not been assessed.
Enterprise business valuation (business valuation)- nothing more than determining the value of the company as non-current and current assets that can bring profit to the owners.

When conducting an assessment examination It is necessary to estimate the value of the company's assets:

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

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

past, existing and future income,
efficiency of the entire operation of the enterprise,
business prospects,
competition in the market.

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

Valuation of an enterprise or company is the process of determining the maximum probable price of a business as a product when it is sold to other owners. Moreover, any enterprise can be sold either entirely or in parts. The company, as the property of its owner, can be insured, bequeathed or used as collateral.

What are the different types of company value?

The activities of the appraiser are regulated federal standard “Purpose of valuation and types of value”(FSO No. 2), which defines several main types of value of any valuation object:

Market price.

The market value of the property being valued, for example a business, is the most likely price at which it can be sold on the day of valuation under the following conditions: the alienation takes place on open market with the existing competition, the participants in the transaction act reasonably and have complete information about the subject of sale and purchase, and its value is not affected by any force majeure circumstances.
The market value of the company is required in the following cases:

when the company’s property or the enterprise itself is seized for government needs;
when the price of placed shares that the company buys by decision of the meeting of shareholders or the supervisory board is determined;
when you need to determine the value of a company acting as collateral, for example in a mortgage;
when the size of the non-monetary part is determined authorized capital firms;
when the owner goes through bankruptcy proceedings;
when it is necessary to determine the amount of property received free of charge.

The market value of a company is used in all situations where tax issues, both federal and local, are resolved.
It is precisely this type of value that is always determined in purchase and sale transactions of a business or any part of it, since 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.

Investment cost– the value of a company that is related to the profitability of the enterprise for a particular investor under existing conditions.

This type of cost depends on personal investment requirements. Every investor invests his money in a business with the goal of making a profit in excess of the amount of invested capital, and not just the return of this “debt”. So the investment value of a company is calculated based on the expected income of the investor and the capitalization rate of these investments. This type The value of a company must be calculated when buying and selling a business, merging, or acquiring companies.

Liquidation value.

This cost option is calculated in a situation where the company’s work is expected to end for some reason (for example, reorganization, bankruptcy or division of the company’s property). When determining the liquidation value of a company, they find the most likely price at which the company can be sold for the shortest possible time exposure, provided that the owner of the object of sale is forced to enter into a transaction to alienate his property.

Cadastral value.

This is the market value approved and established by legislation in the field of cadastral valuation of real estate. It is this indicator that mass valuation methods should arrive at in the case of the cadastral value of an object. This type of value is calculated most often for property tax purposes.

What documents are needed to carry out an assessment of the company's value?

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

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

How to find out the value of a company

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

Determining the value of the company was required to complete certain legal actions. In this case, they turn to a licensed independent appraiser, who draws up his conclusion in the “Appraisal Report”, regulated Federal law № 135.
You need to find out how much your business is really worth on the market; in this situation, the official “Valuation Report” will no longer be needed.

The fundamental difference when carrying out these procedures is not the quality of the appraiser’s work, but the cost of services and the form of the conclusion. In the first case, the specialist is obliged to comply with the requirements of the current legislation regulating his licensed activities, and usually these requirements significantly increase the price for the work.
In the second case, you will need to independently develop and clearly formulate a task for the appraiser, listing all the procedures you are interested in, factors of the company’s value and parts of the business that are subject to examination. So, as a result, you will receive only the information you need.
Business valuation means calculating its value as a property complex, which leads to profit for the owner.
To calculate the value of a company, you need to take into account all its assets, intangible and tangible: real estate, technical equipment, cars, inventory, financial investments. Next, past and potential income, enterprise development plans, competition and the economic environment must be calculated. At the end of the comprehensive examination, the data is compared with information about similar companies, and only after this the real value of the company is formed.
For the above calculations, it is applied three methods:

profitable,
expensive,
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 appropriate calculation method, you need to first analyze the situation, the circumstances at the time of assessment and other conditions.
For some types of business, the valuation of the company is usually carried out based on commercial potential.
For example, in the case of hotel business we deal with guests as a source of income for the company. In a method called profitable, it is this source that will be compared with operating expenses to assess the profitability of the enterprise. This method is based on discounting the profit from renting out the company's property. Finally, after the assessment, both the cost of buildings and land are included.
The company's value is assessed using cost method, When we're talking about about a business that is not subject to purchase and sale, as is the case with government agencies or clinics. This assessment takes into account the cost of constructing the building, depreciation and wear and tear of the property.
Comparative method used when there is a market for such a business. This is a market-based method of assessing value, which is based on an analysis of similar properties that have already been sold in other markets.
Hypothetically, all of the above approaches must give the same value. But in fact, market conditions are not ideal, businesses are often inefficient, and information is insufficient and imperfect.
Determining the value of a company in each of these approaches allows use of various assessment methods:

For the income approach it is:

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

For the cost approach, the following are used:

the net asset method - when it comes to reducing production volumes or closing a business on the initiative of the investor;
and the company's liquidation value method.

For the comparative approach these are the methods:

transactions, which is used in situations similar to the conditions for applying the net asset method;
industry coefficients, estimating operating enterprises that do not plan to close during the period after the examination;
capital market. This method is also intended for “living” companies.

Please note that the last three methods are only valid if there is a similar business that matches the type of the valuation object, otherwise the analysis will not be indicative. Next, we’ll briefly talk about the use of these methods by which the value of a company is calculated.

If you require an estimate of cost for the forecast period, it will be determined discounted cash flow method. To bring potential income to current value, a discount rate is used.
In this scenario, the company’s value is calculated according to the following formula:

P = CFt/(1 + I)^t,

Where P- price,
I- discount rate,
CFt- cash flow,
t– this is the number of the time period during which the assessment occurs.
Do not forget to take into account that in the period after the forecast, your company will continue to operate, which means that future prospects will determine a wide variety of options - from explosive growth of the enterprise to bankruptcy.
It happens that calculations are carried out using Gordon model, implying stable and systematic growth in the company’s sales and profits, as well as equal volumes of capital investments and depreciation amounts.
For this situation, the following applies: formula:

P = 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– flow growth rate.
The Gordon model is most convenient to use when calculating the value of a company if the object of assessment is big business with a large market capacity, stable supplies, production and sales, located in favorable economic conditions.
If bankruptcy of the enterprise and further sale of property is predicted, then to calculate the cost this formula is required:

P = (1 −L av) × (A −O) −P liquid,

Where P– company value,
P liquid– costs of its liquidation (such as insurance, services of a valuation expert, taxes, employee benefits and management costs),
ABOUT– amount of liabilities,
L avg– discount provided due to the urgency of liquidation,
A– the total value of all the company’s assets 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 on the market as a whole.

Quickly calculate the value of a company using an express assessment

Express valuation model, which we will talk about in more detail, is based on the method of discounting cash flow for an enterprise that we already know. For convenience, we abbreviate this term as DDP method For the company. These concepts, as we remember, are used in the income approach to valuing a company.
This approach is divided into the following most common ones: assessment methods:

method of calculating economic profit;
DDP method;
real options method.

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

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

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

In which the indexes i And j the serial 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 firm", excluding debt financing, remaining after taxes (or operating cash flow),
E(Equity) is the amount of the organization’s own capital,
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, it is often the following simplifications are introduced:

Weighted average cost of capital WACC can be denoted as a 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 other calculation options.
And let's assume that the variable r is constant throughout all years. This is due to the fact that the definition this indicator in Russia, even for one specific year, causes big problems and leads to methodological stupor. So, if we do not introduce such a simplification, then we will unreasonably complicate the entire model for express assessment of the company’s value.

As a result of all the above transformations we get the expression kind

Factors of company value within the described valuation model are any scalar quantities and vectors that affect the value of the enterprise in calculations.
Note that forecasting free cash flow for a firm for every year of an indefinite period is quite difficult and practically meaningless. This happens because the meaning of the terms with the index i too small because of the denominator, and the 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 divided into the forecast period and the post-forecast period;
in the first period, cost factors are forecast based on assumptions and plans for further development enterprises;
in the post-forecast period of time, cash flows are estimated based on the hypothesis of a fixed rate of their growth throughout the entire period.

Valuing a company: common mistakes

Anyone who has encountered valuation services knows perfectly well that exactly how they calculate it significantly affects the market value of the same business being valued. The resulting amounts may vary several times. Such results often lead to serious financial damage, conflicts and even litigation.
Let's call There are several main reasons for variations in the value of the property being assessed:

Methodological errors.

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

Intentional misrepresentation of value.

Unfortunately, to this day some market share of assessment services various objects are 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.

Subjective opinion of an expert.

Despite the fact that the assessment procedure is based on specific values and economically sound assumptions, in many respects this process remains subjective. So the outcome may depend on the appraiser’s personal view of the future of the market, financial capabilities and other factors of the company’s value. Deciding how to treat economic conditions, has to be accepted by the expert conducting the analysis himself. 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 per barrel two or three years ago, and not at 25 or even the optimistic 30 dollars per unit?

Wrong statement of the problem.

The size of the final cost, which will be obtained as a result of complex 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 entire procedure is carried out. No wonder it's the same security can be estimated in amounts that differ by 20 or even 50%. This is influenced, for example, by whether it is a minority or majority-owned company. Depending on the purpose of determining the value of the company, the calculation process is carried out differently.

Distortion of official reports.

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

Legislative shortcomings.

Nowadays, experts in the field of valuation turn to three main methods of this procedure - cost, profit and comparative. Official valuation standards state that the final calculation must take into account the results obtained in all three approaches. But these methods do not always correspond to the objectives of the examination.
List of factors to pay attention to, in order to clarify their meaning and receive comments from an expert assessing the value of the company:

The cash flow forecast made based on the results of the analysis and the discount rate reflecting the costs of attracting third-party capital – with the income approach.
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 cost approach.
The adequacy of multipliers (price coefficients) and the comparability of the analogue company with which the comparison is being made – with a comparative approach.