- The market for selling ready-made businesses in Russia is growing year by year. More and more people want to invest money, even small ones, in a real business, to try themselves as an entrepreneur. And often the acquisition of an existing company turns out to be the best option achieving these goals. But only if you approach the issue thoughtfully and thoroughly.
The slightest resistance from the seller in providing information is a danger signal!
When purchasing a ready-made business, regardless of its specifics, you can use the following algorithm of actions.
Begin entrepreneurial activity(as well as expanding an existing one) can be done in two ways: create new business or buy ready-made. Having assessed the pros and cons of the second option, you can decide whether it is suitable, or whether it is better to use the first option.
Advantages of a ready-made business:
- The history of development, good or bad, which makes it possible to evaluate it.
- Availability of premises and equipment.
- Fully staffed.
- Well-established connections and sales channels.
- A finished product (service), sometimes an already well-known brand.
- A certain demand for goods (services), the ability to predict its change.
- Detailed financial and accounting reports.
Disadvantages of a ready-made business:
- The equipment may be worn out and technological processes- outdated.
- The lease may not be renewed.
- The staff may be poorly qualified
- Counterparties may be unreliable; relations with them may have been damaged by the previous owner.
- Subsequently, debt obligations (unpaid taxes, penalties and customs duties or warranty statements).
STEP 2. Select the type of business to purchase
To do this, you need to answer several questions:
1. Is there any type of activity or business that you have dreamed of?
2. Which type of business best matches your knowledge, skills and past experience?
3. What do you want to do: production, wholesale, retail or services?
4. Are you interested in business related to import-export?
4. Do you want to involve your family in working in a ready-made business?
Experts recommend first making a choice between production, retail, wholesale and services, then resolving the issue of import-export, and then determining a specific product (service) or market within the chosen sector.
STEP 3. Decide on funds
First of all, decide how much of your own funds you can allocate to complete the transaction. Then decide how much money you can and are willing to borrow (for example, from a bank).
Note: the possibility of raising borrowed funds to acquire a business depends on the availability of liquid fixed assets and real estate. If you acquire a business that owns such assets, then in most cases you will be able to borrow 50% of the total cost of the business or investment project. Your personal assets can also serve as collateral for a loan to purchase a new business.
STEP 4. Select options that suit the cost
Entrepreneurs who want to sell their business place advertisements in newspapers free ads or in the local line ad department periodicals, in any business publications or newsletters, on specialized Internet sites. Another source of offers are broker companies specializing in the sale of ready-made businesses.
Note: Sellers do not always publicly announce the sale of their business. The reason is that strict confidentiality must be maintained, since the announcement of a sale may cause unrest among customers, employees and suppliers. And many potential sellers choose to use personal networks to find buyers.
Therefore, it is also necessary to make inquiries among friends, acquaintances, entrepreneurs, lawyers, bank employees, accountants, consultants and colleagues. You can also interview suppliers or distributors in the business you are interested in.
STEP 5. Find out the reasons for selling the selected companies
The previous owner may have several of them:
- Changing of the living place. Lack of possibility of direct control and management of the process.
- Disagreements between owners. No joint agreement has been reached on ways to further develop the company.
- Loss of interest in business. After 6-8 years, the activity may simply cease to be satisfying.
- Illness, reaching advanced age. The owner's ability to manage the business is limited, and there are no worthy successors to the business.
- The need for investment in another project. The owner found a more profitable and less burdensome line of business.
- Sale of non-core assets. Some areas of activity large enterprises or holdings are less profitable or do not fit into the overall development concept.
In principle, all reasons can be grouped as follows:
- this business has ceased to generate sufficient profit (the industry is experiencing a decline and decline business activity; the company is under threat of bankruptcy; weak management; the company is involved in criminal scams, etc.);
- the owner intends to engage in some other business or diversify his activities; intends to retire for personal reasons; he does not have enough funds to develop the company.
It is clear that buying a company is advisable only when the owner of the company is guided by considerations included in the second group.
In principle, at this stage, out of all the previously selected options, two or three suitable ones remain.
In the conditions of the Russian market, it is still impossible to estimate the value of a company based on the market value of its shares, since in open stock market Only shares of large enterprises are quoted. Therefore, when assessing small and medium-sized businesses, experts recommend using the following approaches: profitable, market and cost.
Income approach
With this approach, the value of the company is determined by the amount of expected income. This method assumes that the buyer will not pay more for the business than the present value of future earnings for the period of interest. Using this approach, the buyer calculates various options for business development. However, with this approach, the level of risk is often determined too subjectively. This valuation method is good if the company's income is positive and stable.
Market approach
The value of a business is estimated by comparing the recent sales of companies of comparable size. The main condition for applying this approach is a mature market. The value of the company being valued (V1) is determined as the product of the ratio of the market price of the analogue company (V2) and its basic indicator (R2) by the basic indicator (R1) of the company being valued: V1=V2/R2×R1. The basic indicators are usually: net profit, book value of the enterprise. When choosing comparable companies, they are guided by the following requirements: the industry of the enterprises must match, quantitative and quality characteristics the companies should be approximately equal.
Cost-effective approach
The cost of a business is determined by the amount of resources spent on its reproduction or replacement, taking into account physical and moral wear and tear. This approach is most effective when the buyer is looking to compare the costs of acquiring a business with the costs of starting a similar business.
There is no clear answer as to which assessment method to use. In each case, approaches are combined depending on the specifics of the business.
Note: At this step, it makes sense to contact independent consultants, business brokers or professional appraisers. They often play a vital role. After all, determining the value of a business is a process that requires professional knowledge and experience in various fields of law, mathematical analysis, economics, accounting and audit.
At this stage, as a rule, there is only one suitable option left.
STEP 7. Study the selected business in detail
If funds allow (and the game is worth the candle!), it is best to turn to professionals again and order Legal Due Diligence - a comprehensive check of the seller for “due diligence”. At a minimum, it will make it possible to clarify the reliability of the legal and financial information presented, check the correctness of the documents and their compliance with current legislation. As a maximum, “due diligence” includes conducting a legal and financial audit of accounting and tax accounting, assessing the suitability of top managers for their positions, conducting an inventory of property, etc. to infinity.
If there are not many doubts, and the transaction amount is not so large, you can try to do the above procedure yourself: ask as many questions as possible, demand reporting, inquire about the numbers and models of equipment and the dates of their purchase, make inquiries about business reputation, find out about all the obligations of the acquired company, etc.
Note: the slightest resistance from the seller in providing the information you are interested in is a danger signal!
There are also serious reasons for concern:
1. Shortened strict time frames for selling a business.
2. Key information on the object is missing.
3. Obtaining even existing information is difficult.
4. There is no clear reason for the sale or justification; the reasons for the sale are not credible.
5. It was discovered that the seller distorted or incorrectly interpreted at least part of the information about the property.
STEP 8. Minimize possible risks
1. Investigate anything that could potentially harm your business.
2. Find out the condition of the property complex and the features of its location. This will prevent problems, for example, due to the termination of a lease agreement.
3. You need to rely on facts and, if possible, not take your word for it, no matter how trustworthy the seller may be. This is especially true for the volume of profit and turnover of the company declared by the seller.
4. Offer to conclude a guarantee agreement on the absence of debts that do not go through the accounting department. It is signed by all founders and the CEO. The buyer's legal protection is that once the warranty deed is signed, they are personally liable for any borrowings by the company during the last three years. In case of negative consequences the buyer has the opportunity to send creditors to their real debtor, or, if the case goes to court, to file a recourse claim to protect their rights.
5. Lawyers also recommend drawing up detailed plan transfer of managerial powers. This is especially important for maintaining relationships with customers, suppliers, partners in other operations and employees of the acquired enterprise. After all, it is important for the buyer to maintain a viable business.
6. The agreement with the seller must indicate that the new owner acquires only those debts related to the activities of the enterprise that are specified in the agreement. And debts associated with the previous activities of the enterprise do not pass to the new owner. The agreement and its annexes must contain a detailed list of all debts included in the enterprise, indicating the creditors, the nature, size and timing of their claims.
STEP 9. Start negotiations to purchase
If all your doubts are resolved in positive side, make a formal offer and move on to negotiations.
Note: Sellers prefer not to deal with unserious buyers, so don't be surprised if you are asked to put down a deposit, similar to what is done in real estate transactions.
As a rule, in negotiations, both parties start with maximum and minimum offers and gradually soften their terms. Therefore, you must determine in advance the price and terms on which you agree to purchase the business. Naturally, start with more favorable conditions for yourself. Be prepared for the seller to meet your first offer with terms that you consider unfair. This is an inevitable part of bargaining. If your intentions are serious, work towards terms you agree to accept.
STEP 10. Buy a business!
Reference
Market for the sale of ready-made businesses: results of 2006
(www.1nz.ru/readarticle.php?article_id=1278)
The most popular and offered, as usual, are cafes and small restaurants in the price range of $50-150 thousand; hairdressers, beauty salons ($25-50 thousand); car services ($100-250 thousand).
Among travel agencies, offers of 10-20 thousand dollars prevail, for which the demand is, as a rule, very insignificant. Worthy offers can be considered travel companies, possessing not only a travel agent, but also a tour operator license, having their own representatives abroad and agreements with hotels and inns. But the price of such a company will already be from $30 thousand and above.
There have been certain preferences in acquiring businesses related to the provision of intangible services: consulting, auditing companies, educational institutions. Investors are ready to invest up to $150 thousand in such companies that have existed for more than 5-7 years and have all the necessary licenses and permits. Such types of businesses as modeling and concert agencies began to be offered. More offers have appeared for the sale of advertising and advertising production companies.
In the field of medicine and pharmacology, there is an excess supply of medical centers and dental clinics and, on the contrary, demand for pharmacies and pharmacy kiosks, exceeding proposals.
IN retail trade There is a significant excess of supply over demand. This is typical for small shops and pavilions in shopping centers costing 30-180 thousand $.
Among manufacturing enterprises factories for the production of bricks, blocks, and tiles are popular. The buyer can pay up to $1 million for such a business, but he must be sure that all old connections and customers will be preserved. At the same time, the demand for such type of business as the production of PVC windows and doors is decreasing. There are offers for food production (sausage, confectionery shops) costing $400-700 thousand, but the demand for them is small.
Price existing business represents an objective indicator of the functioning of the enterprise and reflects the current value of benefits in the future from its functioning. This allows us to calculate the most likely price at which it could be sold on the open market. The question of how to estimate the value of a business is of a practical nature and has great value for each entrepreneur at various stages of the company's functioning.
How is a business valuation carried out?
First of all, it is necessary to determine main goal, which the process of calculating the value of a business has. There are two possible options here.
First option- the cost is necessary to carry out certain legal actions. That is, you need to receive an official conclusion in the form of an “Appraisal Report”, which will be prepared by an independent appraiser licensed to carry out this procedure.
Second option– an assessment is carried out to determine how much your business is actually worth. To do this, you no longer need an “Assessment Report”, in accordance with the requirements of Law No. 135-FZ.
These options differ fundamentally not in the quality of the work the appraiser does, but in the results obtained. Valuation activity is a licensed type of activity. For this reason, it is subject to certain requirements from the current legislation. Fulfilling these requirements during the process of drawing up the Assessment Report, as a rule, causes an increase in the cost of the specialist’s work.
If the results of the work are not presented in the form of an official Report, but as a Conclusion, during the negotiations a detailed development and agreement on a clearly formulated assessment task takes place. According to this task Appraisers will only carry out the procedures you specify that are required to resolve certain issues.
Business valuation is a procedure in which it is necessary to calculate the value of a business as a property complex that provides its owner with a profit.
The assessment takes into account the value of all company assets: machinery, real estate, equipment, financial investments, warehouse stocks, intangible assets. It is also necessary to take into account past and future income, possible prospects for further development of the company, competitive environment and the state of the market as a whole. Based comprehensive analysis the enterprise is compared with similar companies. After that, information about the real value of the business is compiled.
Methodology
To calculate enterprise value, three methods are used: costly, profitable and comparative. In practice, different situations occur, and each class of situations uses its own recommended methods and approaches.
To adequately select a method, it is necessary to classify situations in advance, determining the type of transaction, the features of the moment for which the assessment is carried out, and so on.
Certain types of businesses are most often assessed on the basis of commercial potential. For example, for a hotel the source of income is its guests. This source is subsequently compared with the cost of operating expenses to determine the profitability of the business. This approach is called profitable. This method is based on discounting the profit received from renting out property. The valuation results according to this method include both the cost of land and the cost of the building.
If a business is not bought or sold, there is no developed business market in this direction, for example, a hospital or government building is being considered, then assessment can be carried out on the basis cost method , that is, it will take into account the cost of construction of the building, taking into account depreciation and wear and tear costs.
If there is a market for a business that is similar to the one being valued, the market or comparative method can be used to determine the market price of the enterprise. This method is based on the selection of comparable properties that have already been sold on the market.
Under ideal conditions, all three methods used should produce the same value. But in practice, markets are imperfect, producers may operate inefficiently, and users may have imperfect information.
These approaches involve the use of various assessment methods.
The income approach includes:
- a method of discounting cash flow, focused on valuing an existing business that will continue to function. It is more often used to evaluate young companies that have a promising product, but have not yet earned enough income for capitalization.
- The capitalization method is used for those enterprises that, during capitalization, accumulated assets in previous periods.
The cost approach includes:
- liquidation value method;
- the net asset method, applicable in cases where the investor plans to significantly reduce production volumes or close the enterprise altogether.
The comparative approach includes:
- the method of industry coefficients, focused on the assessment of existing companies, which will continue to function in post-reporting periods.
- a method of transactions applicable in cases where it is planned to reduce production volumes or close an enterprise.
- capital market method, also focused on existing enterprises.
Methods of the comparative approach are applicable only when choosing an analogue company, which must be of the same type as the company being valued. Below we will briefly look at the use of basic methods for calculating business value.
Brief instructions
To calculate the value of your business in the forecast period, you must use the discounting method cash flows. A discount rate is used to reduce future income to present value.
Then, according to the forecast, the business value is calculated using the following formula:
P = CFt/(1+I)^t,
Where I- discount rate, CFt denotes cash flow, and t– this is the number of the period for which the assessment is made.
At the same time, it is important to understand that in the post-forecast period your enterprise will continue to function. Depending on the future prospects for business development, different options are possible, from complete bankruptcy to rapid growth. For calculations, the Gordon model can be used, which assumes stable growth rates of profits and sales and equality of depreciation and capital investments.
In this case, the following formula is used:
P = СF (t+1)/(I-g),
Where CF(t+1) reflects cash flow for the first year of the post-forecast period, g– flow growth rate, I- discount rate.
This model is most appropriate when calculating indicators for a business with a significant sales market capacity, stable supplies of materials, raw materials, as well as free access to monetary resources and a generally favorable market situation.
If bankruptcy of the enterprise and further sale of property is predicted, then to calculate the value of a business, you need to use the following formula:
P = (1-Lav) x (A-O) – Pliq,
Where P liquid– expenses for liquidation of the enterprise, L avg– discount for urgent liquidation, ABOUT– amount of liabilities, A– the value of the company’s assets taking into account revaluation.
Costs include insurance, taxation, appraiser fees, administrative expenses, and employee benefits. The liquidation value also depends on the location of the company, the quality of assets, the general market situation and other factors.
During the assessment domestic enterprises The date of the assessment is of great importance. Linking settlements to a date is especially important in a market oversaturated with property in a pre-bankruptcy state and experiencing a shortage of investment resources.
The Russian economy is characterized by an excess of the supply of assets over demand. This imbalance affects the value of the property offered for sale. The price of a property in a balanced market will not be the same as the value in a depression. But investors and business owners will be primarily interested in the real value in a specific market in certain conditions. And buyers are focused on reducing the likelihood of loss Money, so they require guarantees. When assessing the value of a business, it is necessary to take into account all risk factors, including bankruptcy and inflation.
In conditions of inflation, at first glance, it is best to use the discounted cash flow method for calculations. This is true only if the inflation rate is predictable. However, it is quite difficult to predict the flow of income in conditions of instability for several years in advance.
Accurately valuing a non-public company whose shares are not traded on a stock exchange is always a non-trivial issue. Each person interested in a 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 evaluating companies, admittedly, are not far from the classic book truths prescribed by Mason and Harrison. Business angels, private investors, venture capital funds and entrepreneurs still use ratios and multiples, discounted cash flows and net assets. But which method is right for you?
General provisions
Estimating the value of a company involves a number of assumptions, in particular, the real size of the market (young, emerging industries are especially difficult to “digitize”), as well as financial forecast. Often, an entrepreneur's business plans may not coincide with the investor's vision.
Another subjective indicator is the degree of return required by the investor to cover all his risks. The earlier an investor “enters” a company, the higher the return he requires. At the earliest stage of development, only one company out of ten invested turns out to be profitable, notes Konstantin Fokin, president of the National Association of Business Angels. “I work closely with companies because I want the profitability of 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 investing.
When assessing the market and companies, entrepreneurs rely on similar transactions that have already taken place, which will allow them to obtain an approximate multiplier and understand the size of the market. The investor makes the final decision on the value based not only on data from similar transactions, but also on his own intuition and the results of “bargaining” with the entrepreneur.
At the earliest stage of company development, the investor Special attention pays attention to the analysis of other company indicators: the team, potential demand for technology, systemic risks associated with the general economic and political background, as well as possible barriers to entry for competitors.
At the idea stage, it is very difficult to give even an approximate assessment of the future company - this is an equation with many variables.
But an investor is unlikely to be satisfied with such an answer. “Business angels invest money in businesses; they do not finance research projects,” states Igor Panteleev, executive director of the National Commonwealth of Business Angels. Most often, private investors reject startups precisely because the young company lacks sales.
Discounted Cash Flow Method
Fits: For fast-growing, early-stage startups with little or no revenue.
Not applicable: to tech companies.
Basis of assessment: The value of the company is determined from the amount of free cash flow of future periods. The flow amount is discounted taking into account the risks of future years. The discount rate is determined based on the weighted average cost of capital.
Minuses: overestimation of the real value of the company, inaccurate assumptions (company revenue in future periods, sales growth rates, risks, discount rate).
Method of multipliers and coefficients
Fits: For established and profitable companies with modest assets.
Basis of assessment: Comparison with listed companies with similar operating and financial structure. The valuation is based on several indicators: turnover, EBITDA, EBIT, annual growth. Transactions with similar companies that were 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 shares and its net profit per share. The assessment determines the development potential of a company or industry as a whole; as a result, the investor or entrepreneur assesses the strategic value of the company.
Minuses: difficulties in finding a suitable analogue, closeness of similar transactions, complex data collection process.
Net asset method
Fits: For large companies with significant underlying assets.
Doesn't fit: for the small and medium enterprises sector.
Basis for assessment: balance sheet indicators of the company. An important plus this method— the ability to qualitatively check the resulting value of a business based on its official accounting documents.
Minuses: Difficult to value intellectual property.
Other methods for valuing companies
Lucius Carey's Rule of Thirds: The company is divided into three parts between the investor, the founder/director and management.
Competency Rule: the assessment of each party’s share is based on the professional skills and competencies of the company participants.
Greed factor: the amount of investment multiplied by the share of the director of the business is divided by the investment of the director himself multiplied by the share of the investor. If the resulting coefficient is from 5 to 8, the company’s valuation is adequate; if it is more than 10, the entrepreneur is greedy and gives investors too small a share.
Real experience
Sergey Toporov, senior investment manager at 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 forecasting future value with discounting at the current moment.
The most effective evaluation method is the negotiation method. We understand the minimum, comfortable and maximum assessment of the project for us. Next, we communicate with the project and compare this assessment with the expectations of the founders. The figure we settled on is the real cost of the project today.
Margarita Vlasenko, project curator of the IT park in Naberezhnye Chelny:
We use the income method when estimating 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 almost impossible to access real numbers. Negative side the cost method is that it does not take into account the cost intellectual property, the “burning eyes” of the team and other intangible values. But at the initial stage, the further success of the project depends on them. In practice, the income method provides the most reliable data on a startup. But here, too, you need to understand that none of the approaches provides 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 existence.
Danila Nekrylov, analyst at Bright Capital fund:
Traditional approaches to company valuation (comparative, cost, income) to determine the pre-money valuation of a venture project are practically not used. This is due to a high degree of uncertainty regarding the future cash flows of the project, and often the absence of analogous companies in Russia and in the world. And evaluating a project based on 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 business, project cost estimation is the result of negotiations between the company founder and investors. Often a venture fund evaluates a project based on its previous experience of investing in projects at the same stage of development.
If, suppose, in one venture project for $1 million, an investor received 30%, and for exactly the same amount you can only give him 10%, then the investor will have many questions about why your project is better than its analogue.
The following scheme is also used to determine the project assessment range:
- The venture fund determines a “comfortable” share in the investment project, usually it lies in the range of 15-45% and depends on the stage of the project and the presence of other investors. Funds, as a rule, are not interested in control.
- Accordingly, if the investor for the amount of investment required by the project does not receive his comfortable share in 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.
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Finding out how much a business is actually worth requires a valuation process. The main prerequisite for its implementation is the justification of the real price of the organization, which in its essence becomes a reflection of the results achieved in the process of economic activity.
Since it is necessary to evaluate the value of a business using several parameters at once, the close attention of analysts includes current and future profits, costs of organizing similar projects, liquidity, competitors in the market, intangible and tangible assets, the balance of supply and demand for services.
Business value through the valuation procedure
The need for an assessment arises when a company is acquired, when choosing a path for its development, whether it is being sold or purchased. In this material we will list the most effective methods determining the market value of an organization, which is useful for both buyers and sellers to learn about.
Three approaches to business valuation
- Expensive. This approach to business valuation involves adding up all the investments made. Provides application.
- Net asset method.
- Liquidation value method.
- Profitable. Based on the idea that the value of a project depends on its ability to generate profit. Methods that are used within it.
- Income capitalization method. The company's prospects are assessed by taking into account the company's net profit for the year, multiplied by the capitalization index. The latter displays the expected return on investment and potential risks. Organizations with stable profits can be sold with a capitalization ratio of 0.1–0.2; for projects that are difficult to evaluate, an index of up to 0.5 is assigned.
- Discounted cash flow method. Provides for forecasting the company's future income and discounting it according to the capitalization ratio.
- Comparative. It concludes the main approaches to business valuation. It involves determining the company's prospects in comparison with similar organizations. The following methods can be used.
- A capital market method based on the market prices of competitors' shares.
- A method of transactions, which is based on an analysis of the prices for the repurchase of controlling stakes in similar companies.
- The method of industry coefficients, which allows you to calculate the price of an organization based on industry statistics.
Six Business Valuation Methods
Below we will look at 6 methods for determining the price of a business project, talk about their advantages, areas of application, reasons for comparative analysis and shortcomings.
Discounted Cash Flow Method
Optimal: for fast-growing startups, in this moment those at an early stage of development, with little or no income.
Not suitable: for technical and manufacturing companies.
Basis for assessment: The company's business value is assessed based on the total free cash flow of future periods. The value of the flow is discounted taking into account the potential risks that can be expected. The discount rate is approved based on the weighted average cost of capital.
Flaws: inflated price obtained as a result of calculations, very approximate assumptions (company revenue in the following periods, discount rate, rate of increase in sales).
Method of multipliers and coefficients
Applicable: for large, profitable firms with modest assets.
Does not apply: for organizations whose market share is insignificant.
Basis for assessment: comparison with publicly traded firms with identical financial and operational structures. How to estimate the value of a business for sale using this method? To do this, several indicators are used: average annual turnover, annual growth, EBITDA, EBIT. Transactions with similar organizations that were sold to financial investors come into view. A significant role is played by the comparison of the market price of a company's shares and its net profit per share. The audit reveals the development potential of the organization and the industry as a whole.
Flaws: labor-intensive search for an analogue, closed transactions, difficult process of data accumulation.
Net asset method
Optimal: For large firms with significant underlying assets.
Not used: for the small and medium enterprise sector.
Basis for assessment: balance sheet indicators of the company. One of the advantages of the method is a high-quality verification of the audit result in comparison with accounting documentation.
Flaws: difficulty in determining the value of intellectual property.
Cost incurred valuation method
Fits: to evaluate enterprises with large annual turnover and significant assets.
Not used: for startups.
Basis for assessment: The method is based on the premise that a similar project can be launched by another businessman in a comparable time frame with similar costs. The analysis allows us to answer the questions:
- how much did the creation and development of the project cost;
- how much money was invested in development;
- how many people are on the company’s staff and what is the size of the wage fund;
- how much money was spent on renting premises, purchasing equipment, licenses and other assets.
The task of the analysis is to summarize all costs “per circle” and present them as an opportunity to evaluate ready business"to the money." In this case, the funds invested by the investor are considered the price of the additional share. For example, the stated costs are $2 million. In this case, an investment of 1 million dollars will raise the price of the project to 3 million dollars, the investor’s share will be 1/3 of the project that received the investment (that is, “after money”).
Flaws: the methodology is based on determining the minimum costs for the project and is unprofitable for the seller, since it does not allow taking into account intangible assets created in the process of activity in the form of ideas, utility models, inventions, etc.
Valuation method based on total asset value
Fits: for owners of large material assets: real estate, wells, mines, tunnels and industrial complexes.
Does not apply: for enterprises working with intangible assets and in the field of innovation.
Reasons for analysis: The principle of assessing the value of a business is based on the summation of all the assets of the company.
Flaws: there is a high risk of underestimating the project, since it is impossible to take into account competencies, quality and potential staffing units in organizations whose main value lies in their employees.
Method for assessing intangible assets
Optimal: for service organizations, online enterprises, research centers.
Ineffective: for manufacturing enterprises.
Basis for assessment: to value a business when selling for the seller as an interested party, profitably at a higher rate - accounting for intangible assets provides this opportunity. Some intangible assets (IIA) are mentioned in the balance sheet (this usually refers to the creation of intangible assets by writing off money from the company's account, which is reflected in the expense column). However, it is incorrect to assume that the accounting balance sheet contains the entire list of intangible assets that the enterprise has. More often, the balance sheet shows only obvious intangible assets and their nominal value. The opposite extreme is an attempt to include functions and elements of business in the rank of intangible assets: employees, client base, suppliers, that is, everything that can increase the value of the project in the eyes of the buyer.
Disadvantages and ways to achieve efficiency: It is difficult to call this method objective, since the seller offers to evaluate the business twice upon purchase, first as a material object, and then by dividing it into intangible assets. If the current owner speaks about intangible assets in this way, it means that he is trying to justify the assigned price, which he could not link to more real assets.
Objectively assessing a company taking into account intangible assets means identifying those resources that have independent value, but are not reflected in the material base of the enterprise. This group can include 9 types of intangible assets.
- Licenses and certificates. Their significance lies in the fact that they expand the scope of the organization's activities. The price can be determined by the principle of substitution: the buyer can find out how much such permits cost from any law firm.
- Intellectual property objects. Other methods, for example, the option of determining the value of a business by turnover, do not take into account the value of trademarks, patents, and copyrights. Meanwhile, these assets can be used to reduce the tax base and the cost of withdrawing dividends, as well as to receive licensing fees from other market players.
- Insurance policies. Beneficial due to insurance payments secured by the money of the previous owners, so the presence of insurance can be regarded as a positive argument in favor of purchasing the project.
- The organization's debt to its owners. Despite the fact that debt is regarded as an obligation of the organization, it is useful because it forms an intangible asset. Now we are talking about transferring the debt to the new owner in order to withdraw future dividends. This makes it possible to reduce costs by 12%.
- Exclusive terms of cooperation with suppliers and contractors. The cost of a business in terms of income will be higher, the more favorably the organization differs from its competitors. This includes the discount percentage and terms of delivery of products that differ from the standard ones available to each market participant. Thus, a grocery store may have a supplier discount of 35% of the retail price and a payment deferment of 15 days, as opposed to the basic 25% and 5 days of deferment. The price of this asset is calculated depending on the objects of trade turnover according to these criteria: with a trade turnover of $5,000 per month, this kind of arrangement can bring a profit of $500 and another $50 if the proceeds are placed on deposit before the grace period expires. Over the course of a year, such arrangements will bring a profit of $6,600.
- Know-how. How to evaluate a business correctly if the company put up for sale has knowledge that becomes its competitive advantage? In this case, the method of accounting for intangible assets is also used. The know-how category includes standards, regulations, management and accounting principles, and marketing tools. They are rarely documented, so only an experienced appraiser can determine them. The event is worth the effort - standardized and classified, the knowledge has significant commercial potential.
- Office rental agreement. Having an office in a good location is beneficial in terms of customer traffic and cost per square meter. This creates a separate intangible asset that can be sold to a new owner.
- Web resources. The value of a business can also be assessed from the profit brought to the organization by traffic to the site. Your own online resource and public pages on social media are assessed based on the replacement principle (how much it costs to create and promote an analogue) or by the number of customer requests generated by the site per month. Knowing the amount of the average check will allow you to calculate the amount of revenue generated by the site. Please note that sites and groups are both assets and liabilities that have an expense component. Determining the costs per 1 request will allow you to objectively calculate the costs of promoting a resource - the result will be a conclusion about the potential of the service.
- Client base. Forms a separate intangible asset if it is suitable for applying marketing tools to it (an example is an email newsletter).
For an entrepreneur who has planned to attract investments or sell a share/entire enterprise, it is important to know how to evaluate a ready-made business, and it is advisable to follow recommendations, the purpose of which is to reach a compromise with the counterparty.
- Each method has its drawbacks. Maximum objectivity can be achieved only with an integrated approach that allows for mutual verification of calculation results.
- Choose the most appropriate assessment methods for your project and defend your opinion.
- Help the investor/buyer conduct due diligence on the organization and be prepared to provide a rationale for your strategy.
- The price of the same enterprise is different for different buyers; the audit does not end with just calculator calculations from the Internet.
How to evaluate an existing business when purchasing: help from First Broker
The specialists of the First Broker company will give you competent answers to the question of how to evaluate a ready-made business when purchasing, and, if necessary, will take responsibility for determining the market value of the project. Activities within the framework of the service are provided in a short time (from 5 days) at reasonable prices (from 15 thousand rubles). The confidentiality of the information received is guaranteed by contract.
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