Combined business valuation methods. Business valuation. How to evaluate a business before buying it. According to industry analogues

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From this article you will learn:

What is the value of the company and why is it needed

What are the types of company value?

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 on the organization and launch of new companies with a view to their further sale. Although this is far from the only reason for selling a business. When a firm goes bankrupt or cannot solve its problems on its own, there is often a need to assess the value of the company before selling. In this article, we're going to talk about how to sort out everything related to the cost of your business and avoid difficulties.

Why you need to know the value of the company

Now the vast majority of firms in Russia do not consider the valuation of the company to be something necessary, and their owners often do not see the point in this until the business enters large turnovers and the public arena. Prior to that, the assessment is perceived as a reason for the personal pride of the owner.

The economic goals of calculating the value of the company are actually about twenty, but only three important:

This provides objective data on the state of the business and the effectiveness of the administrative apparatus in it. Reacting to them, the owners can always correct the course in time.
It is impossible to apply for additional cash injections from investors without knowing the true value of the company, otherwise you risk not getting what you came for.
The appraisal makes it possible to correctly and competently take into account the assets that have arisen in the course of economic activity firms.

Of course, valuation is necessary not only for buying or selling ready business. This indicator is important for strategic management company. A clear understanding of the value of your enterprise will also be required when issuing securities, shares and entering the stock market. It is also significant that not a single investor will agree to invest his 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.

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

past, present and future income,
the efficiency of the entire operation of the enterprise,
business outlook,
market competition.

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

Estimating the value of an enterprise or company- is the process of finding out the maximum probable price of a business as a commodity when it is sold to other owners. At the same time, any enterprise can be sold as a whole or in parts. The company, as the property of its owner, can be insured, bequeathed or used as collateral.

What are the types of company value?

The activity of the appraiser is regulated by the federal standard "Purpose of valuation and types of value"(FSO No. 2), which defines several main types of value of any appraisal object:

Market price.

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

when the property of the company or the enterprise itself is seized for state needs;
when the price of outstanding shares is determined, which the company buys by decision of the meeting of shareholders or the supervisory board;
when it is necessary to determine the value of the 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 required to determine the amount of property received free of charge.

The market value of the company is applied in all situations where tax issues are resolved, both federal and local.

Just this type of value is always determined in transactions for the sale of a business or any part of it, since the market value is the most objective indicator and does not depend on the desires of the participants in the process, it corresponds to the real economic situation.

Investment cost- such a value of the company, which is associated with the profitability of the enterprise for a particular investor in the existing conditions.

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

Liquidation value.

This cost option is calculated in a situation where the end of the company's work is expected for any reason (for example, reorganization, bankruptcy or division of the company's property). Determining the liquidation value of the company, they find the most probable price at which the company can be sold for the shortest time exposition, provided that the owner of the object of sale is forced to make a deal to alienate his property.

Cadastral value.

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

What documents are needed to assess the value of the company

Duplicates or copies of the constituent documents of the enterprise.
Documents on the inventory of the company's property.
Written confirmation of the structure of the company and its economic activities.
For joint-stock companies, duplicates of securities issuance reports and copies of prospectuses will be required.
Documentation on fixed assets.
If there is real estate on lease, then copies of the contracts must be submitted.
To assess the value of the company is required financial statements for 3-5 years - about all the 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.
Breakdown of accounts receivable and accounts payable.
If the firm has subsidiaries, then it is necessary to collect information about them and submit financial documentation for them.
A ready-made business development plan for the next 3-5 years, containing potential gross revenue, investments, expenses and net profit calculation in each next year.

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

How to find out the value of a company

Obviously, one of the most objective performance indicators operating business is its cost. It makes it possible to calculate the price at which the enterprise can be sold on the open market in a competitive environment, or to assume the future value of the benefits of the firm. The question of how the valuation of the company is carried out is a serious practical task of high importance for any entrepreneur.

In order to obtain an adequate assessment, it is first of all worth define the main goal costing procedures. The most likely options are:

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

The fundamental difference in carrying out these procedures is not in the quality of the appraiser's work, but in the cost of services and in the form of a conclusion. In the first case, the specialist is obliged to comply with the requirements of the current legislation governing his licensed activity, and usually these requirements significantly increase the price for the work.

In the second case, you will need to independently develop and clearly formulate a task for the appraiser, listing all the procedures you are interested in, the company's value factors and parts of the business that are subject to examination. So as a result, you will receive only the information that you need.

Business valuation means the calculation of its value as a property complex, which leads to a profit 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, stocks, financial injections. Further, past and potential incomes, plans for the development of the enterprise, competition and the economic environment are necessarily calculated. At the end of a comprehensive examination, the data is compared with information about similar firms, and only after that the real value of the company is formed.

For these calculations, apply three methods:

profitable,
costly,
comparative.

However, in fact, there are so many situations that they are segmented into classes, each of which requires its own approach and corresponding method.

To use the most appropriate calculation method, you must first analyze the situation, the circumstances of the moment of assessment and other conditions.

For some types of business, the valuation of the company is carried out, as a rule, based on commercial potential.

For example, in the case of 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. In conclusion, after the assessment, both the cost of buildings and land are included.

The value of a company is assessed using cost method when it comes to a business that is not subject to sale and purchase, as is the case with government agencies or clinics. This appraisal takes into account the price of construction of the building, depreciation and depreciation of the property.

Comparative method apply when there is a market for such a business. This market method valuation, which is based on the analysis of already sold similar objects in other markets.

Hypothetically, all of the above approaches must give the same value. But in fact, market conditions are not ideal, enterprises are often inefficient, and information is insufficient and imperfect.

Determining the value of the company in each of these approaches allows use of different evaluation methods:

For the income approach, these are:

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 a company has a potentially promising product.

For cost approach are used:

net asset method - when it comes to reducing output or closing a business at the initiative of an investor;
and the salvage value method of the company.

For a comparative approach, these are the methods:

transactions, which is used in situations similar to the conditions for applying the net assets method;
industry coefficients, which evaluates operating enterprises that do not plan to close in the period after the examination;
capital market. This method is also intended for "live" companies.

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

If you require a cost estimate for the forecast period, it will be determined discount method cash flows . In order to bring potential income present value is subject to a discount rate.

In this scenario, the calculation of the value of the company is carried out according to the following formula:

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

where P- price,

I- discount rate,

CFt- cash flow,

t is the number of the time interval in which the evaluation takes place.

Do not forget to take into account that in the period after the forecast, your company will continue to operate, which means that the future prospects will determine a wide variety of options - from the explosive growth of an enterprise to bankruptcy.

It happens that calculations are carried out using Gordon model, implying a stable and systematic growth in sales and profits of the company, as well as equal volumes of capital investments and depreciation.

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 large market capacity, stable supply, production and sales, located in a favorable economic environment.

If the bankruptcy of the enterprise and the further sale of property are predicted, then this formula is required to calculate the cost:

P = (1 −L cf) × (A-O) -P liq,

where P- company value

P liq– the costs of its liquidation (such as insurance, the services of an appraiser, taxes, employee benefits and management costs),

O– amount of liabilities,

L cf– discount provided in connection with the urgency of liquidation,

A- the total value of all assets of the company after their revaluation.

The results of calculations according to the current formula are also affected by the location of the enterprise, the quality of assets, and the situation on the market as a whole.

Quick calculation of the company's value using express valuation

Rapid valuation model, which we will talk about in more detail, is based on the method of discounting the cash flow for the enterprise already known to us. For convenience, we will abbreviate this term as DDP method For the company. These concepts, as we remember, operate in the income approach to the assessment of the company.

This approach is divided into the following most common in it assessment methods:

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

According to a lot of information, both direct and indirect, the DCF method is the most adequate in determining the value of a company. Provided that the criterion for the effectiveness and expediency of the method, we choose the display of behavior stock market(for example, the capitalization of an enterprise according to its data).

Important, that DDP method has several varieties, corresponding to different purposes and differing in the methods of 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 DP for the company (Free Cash Flow to Firm);
and another type of cash flow discounting - for capital (Capital Cash Flow);
adjusted present value (Adjusted Present Value).

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

in which 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 left after taxes (or operating cash flow),

E(Equity) is the amount of equity capital of the organization,

WACC(Weighted Average Cost of Capital) is translated as "weighted average cost of capital", which is calculated as follows:

rd- the cost of the company's capital, which is borrowed,

t- income tax rate,

r e- the amount of equity capital.

When calculating the value of companies in Russia, often the following simplifications are introduced:

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

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

Company value factors within the described valuation model are any scalar values and vectors that affect the value of the enterprise in the calculations.

Note that forecasting a firm's free cash flow for each year of an infinitely long period is difficult and makes little sense. This happens because the value of the terms with the index i too small due to 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 practical an approach:

the value of the company is divided into the forecast period and the post-forecast period;
in the first period, cost factors are predicted based on assumptions and plans for the further development of the enterprise;
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.

Company valuation: typical mistakes

Everyone who has dealt with valuation services is well aware that the way they are calculated has a significant impact on the market value of the same business being valued. The resulting amounts may vary by several times. Such results often lead to serious financial damage, conflicts and even litigation.

Let's call several main reasons for the variation in the value of the appraised object:

methodological errors.

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

Deliberate misrepresentation of value.

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

subjective expert opinion.

Although the estimation procedure is based on specific values and economically sound assumptions, in many respects this process remains subjective. So the result may depend on the appraiser's personal view of the future of the market, financial opportunities and other factors of the company's value. The decision on how to deal with economic conditions is up to the analyst doing the analysis. And not always he will be able to predict even the most seemingly predictable things. Judge for yourself: who could predict the development of the oil market two or three years ago at $66 per barrel, and not at $25 or even the optimistic $30 per unit?

Wrong assignment.

The amount of the final cost that will be obtained as a result 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 ultimate goals for which the entire procedure is carried out. It is not surprising that the same security can be valued by amounts that differ by 20 or even 50%. This is influenced, for example, by whether it is in a minority or a controlling stake. Depending on the purpose of determining the value of the company, the calculation process is carried out in different ways.

Distortion of official reporting.

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

Legislation flaws.

Today, experts in the field of valuation refer to three main methods of this procedure - costly, profitable and comparative. The official evaluation 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 consider, in order to clarify their meaning and get comments from an expert conducting a company valuation:

The cash flow forecast based on the results of the analysis, and the discount rate that reflects the cost of raising third-party capital, - with an income approach.
The cost of all intangible assets (including those that are not included in this category according to the legislation Russian Federation) – with a cost approach.
The adequacy of the multipliers (price ratios) and the comparability of the company-analogue with which the comparison is being made - with a comparative approach.

Starting a business from scratch is a risky and troublesome business. In some cases, an already operating business is easier and faster. But it's not as easy as it seems at first glance. The seller tries to sell his goods more expensive, and the buyer seeks to buy cheaper. A conflict of interest arises, the resolution of which requires a methodology for assessing the value of an existing business. It should be quite simple and understandable, and, at the same time, suit both the buyer and the seller. Unfortunately, there is no best method business valuation. There are many different approaches to solving this problem. Which method will be used by the interested parties in a particular situation depends on the participants in the transaction.

So, in this article we will give several methods that answer the question: how to value a business? Choose the one that best suits your particular situation.

Business Valuation Methods

1. Comparison of yield with the base rate

The most simple and effective method estimating the value of a running business. The method is based on comparing the current profitability of the business with the base rate of return (risk-free). This takes into account the risk premium. The method is based on the postulate: The higher the risk, the higher the return on investment should be..

The base rate of return is the ability to place cash with almost zero risk of losing them. The risk premium is the additional desired return on top of the base rate, taking into account the risks you bear when buying a business (or a stake in it).

If the asking price for the business is lower than the estimated price, then it makes sense to buy. If higher, then you need to either bargain, or even refuse to participate in this project.

An example of business valuation by this method:

The base rate is 7%. The risk premium is 2%.

The oil company Lukoil issued (released) shares in the amount of 850,563,255 shares. The company's net profit for 2016 is 182,566,224,000 rubles. The market price of one share is 2880 rubles. Does it make sense to buy shares at the current price?

Required return on investment: 7% + 2% = 9%

Current yield: 182,566,224,000 rubles. / 850,563,255 shares = 215 rubles. per share.

215 rub. / 2880 rub. x 100% = 7.47%

The current return on investment in Lukoil shares is below the required one. Therefore, buying shares is not worth it.

At what price does it make sense to buy shares?

215 rub. / 0.09 \u003d 2,389 rubles.

This method does not take into account the situation on the market, as well as the processes taking place in the company. For the accuracy of the forecast, it is necessary to track the situation for several years. At the same time, it allows relatively fast evaluate business performance and get an idea of its expected profitability. The method can be used not only in the stock market, but also when buying a small business or company.

2. Discount method

It is very similar to the previous method, but forecasts for future profits are used to evaluate business performance and its value. Before offering a company for sale, a business plan is drawn up, which gives the prospects for business development, and provides a calculation of the projected profitability by year.

On average, investments in a company pay off in 5 years. So the forecast is made for five years. Discounting is based on the postulate: tomorrow's money is worth less than what is available on the this moment . How much cheaper? On the required return. If we want to recoup the investment in 5 years, then the required return on investment should be at least 20%.

An example of enterprise valuation using the discount method:

Initial data:

Estimated income by year:

1 - 200 000 rub.

2 - 250 000 rub.

3 - 310 000 rub.

4 - 370 000 rub.

5 - 440 000 rub.

Let's calculate the profit of the enterprise, taking into account the discount:

1 - 200 000 rub. / 1 = 200 000 rub.

2 - 250 000 rub. / 1.2 \u003d 208 333 rubles.

3 - 310 000 rub. / 1.2 / 1.2 = 215 278 rubles.

4 - 370 000 rub. / 1.2 / 1.2 / 1.2 = 214 120 rubles.

5 - 440 000 rub. / 1.2 / 1.2 / 1.2 / 1.2 = 212 191 rubles.

Enterprise value at current prices:

200 000 rub. + 208 333 rub. + 215 278 rub. + 214 120 rub. + 212 191 rub. = 1 049 922 rub.

3. Cost method

Business valuation is made on the basis of the costs that were required to create it. On a piece of paper write out all your expenses, summarize and multiply by one and a half. One and a half is a bonus for the work you have done.

4. The method of business valuation by asset value

The entire business is made up of a collection of assets. We evaluate each asset separately, and then summarize their value. We get the value of the company. The method is suitable for evaluation simple businesses. It is quite difficult to evaluate intellectual property using this method.

In addition, it may be difficult to assess the effectiveness of the use of assets. For example, a business contains many assets and the value of the business is high. However, the return on the assets themselves can be extremely low. Therefore, this method is suitable if you plan to sell the acquired business in parts. In the West, this is a fairly common type of business. Remember the movie Pretty Woman.

5. Method of analogy

Business valuation is made on the basis of a comparison of the enterprise being valued with a similar enterprise that was recently sold or incorporated. It is impossible to build a completely unique business - there are always similar companies.

6. Substitution method

The option of creating a similar business from scratch is being considered. After that, a discount is made to the resulting value in order to interest the buyer in buying an already operating business.

Conclusion

As we can see, there can be many methods for calculating the value of a particular enterprise. It all depends on the flight of your imagination and the ability to negotiate with the buyer (if you are selling a business) or the seller (if you are buying). At the heart of all methods is a compromise of interests. You can profitably present your business to an investor - sell your business at a high price, but if you can’t, you will get very little for it or you will be left with “illiquid assets” in your hands.

There are significantly more people willing to sell their business than those willing to buy it. Therefore, in negotiations, the investor (potential buyer) always has a stronger position, and it is not at all easy to convince him to part with the money. If you are selling a fairly large business, then you can resort to the help of professional appraisers. They will not only tell you how evaluate a business but also help with its sale.

Business valuation is the procedure for calculating the value of a company, business, or share thereof. Any manager with the help of business assessment can make the right decision on the sequence of development of his enterprise.

Business valuation is the determination of the non-market or market value of a business as an integral set of property. It is also an assessment of the right to profit. When evaluating a business, they determine the results of the company's activities, its efficiency, forecast income, analyze the market and the competitive environment.

Company or enterprise valuation

When assessing the value of a business, many factors are taken into account, for various organizations they evaluate different indicators. For example, for industrial enterprise(plant, factory) evaluate the value of the property complex. For companies that are engaged in the service sector or trade, the priority is to evaluate their income.

Company valuation is necessary for:

partial or complete sale of the company;
in creating a business plan;
company restructuring;
conducting various operations with the assets of the enterprise;
insurance operations;
obtaining a loan for business development;
revaluation by the company of assets in accounting;
issue of assets;
taxation;
determining the creditworthiness of the company;
determination of the rental fee when renting a business;
relevant court decisions;
making various management decisions.

The valuation of the enterprise's business is carried out in the following categories:

minority and majority stakes in the company are evaluated. This task gives the most complete picture of the value of a large block of shares or a business as a whole;
the property complex, the company's assets, as well as the financial flows of the enterprise are evaluated;
the company's shares quoted on the market are evaluated.

Business Valuation Methods

There are 3 methods for assessing the value of a business: profitable, costly and comparative. When this analysis, choose the method that gives the most accurate estimate.

The cost method is used taking into account the costs incurred. The advantages of this method:

based on existing assets;
suitable for the valuation of enterprises, investment and holding firms that have just started their activities.

The cost method does not take into account the prospects for business development - this is its drawback.

The liquidation cost method, as well as the net asset method, are components of the cost approach.

The income method is carried out by calculating the present value of the expected profit. The underlying factor that is considered is income and profit. How more income company, the higher its value.

This method is the most popular and common, based on future profits. With its help, the valuation of the business reflects the results of the company's vigorous activity.

The comparative method involves the analysis and comparison of the business being assessed with competitive enterprises that operate in the market. Information for this method is drawn from open stock markets, previous transactions with business assets, and the absorption market.

Business Benefits

For any enterprise, business valuation has the following advantages:

you can increase the efficiency of company management;
develop a good business plan;
make an informed investment decision;
easy to restructure the enterprise;
obtain information about the market value of the company;
buy back shares from shareholders;
receive weighted taxation;
determine the value of shares in capital, securities.

The factors that determine the market value are future and current profits, the cost of creating a company with assets, the ratio of supply and demand, the degree of business control, and others.

Business valuation process

The valuation of a business enterprise is carried out in the following way:

analysis of the market where the company is active;
collection of necessary information about the assessed object;
calculation and agreement of results using business valuation methods;
report and interpretation of results.

Company valuation - determination of the value of the evaluated block of shares. The package can be majority, minority, controlling and blocking, depending on the number of shares. Valuation is carried out for enterprises with any type of shares.

The liquidity indicator (the quality of securities, which characterizes the possibility of their sale) affects the value of shares. High price security depends on high liquidity.

Valuation of shares mainly determines their value, the ability to bring profit to the owner. Indicators such as net assets, dividends, capital market help to evaluate shares.

The market value of shares is a certain price at which the object of analysis and evaluation can be presented on the market with a large number of competitors.

Services in the field of business valuation are mainly provided by specialized companies offering their strategies in this matter. A wide range of services allows you to carry out many actions, thus, it is estimated:

property value;
intangible assets (licenses, trademarks, technical documentation);
the value of securities;
the cost of goods;
the cost of equipment and machinery.

When evaluating, they determine the market value, as well as other types of value (investment, collateral, insurance).

When determining the value of a business, the appraiser calculates the value of the assets and liabilities of the enterprise. Assets include any movable and immovable objects, equipment, financial investments, machinery, goods, cash reserves, employee qualifications, intellectual property (brands, trademarks), business reputation. Liabilities are various debts and outstanding obligations of the enterprise.

In the assessment and analysis of the value of a business, several approaches are used, so the assessment is ultimately as accurate as possible.

For many Belarusian owners, the issue of business valuation causes difficulties. Financial analyst Zubr Capital Viktor Denisevich talks about the most practical valuation method and gives a formula for calculating the value of a company.

Valuing a company is like playing chess. A chess player who plays white and one who plays black can evaluate the position on the board differently. Likewise, the owner and investor are likely to have different views of the same company.

Obviously, this is because the owner and the investor have different goals. From the owner - to sell the company or part of it for the highest possible cost, from the investor - to buy a share or the entire company for the lowest possible amount.

When in question about the valuation of a company, there are an almost infinite number of ways to form it. But the most practical and adequate in this matter is comparative method.

Its essence is that you form an estimate, not only based on the internal resources of the company, but, first of all, based on information about the value of peer companies.

Let's say we have a conditional company "A", which is engaged in the production of shoes in Poland. Let's look at her example, how the valuation of the company is formed.

If you want to know the value of your company, then, first of all, you should start with a benchmark. That is, choose companies-analogues and analyze their value. Of course, the availability of this information depends, first of all, on the development of the stock market and the openness of the M&A market in the region.

The first difficulty that you will encounter is the almost complete lack of information about peer companies, on the basis of which you can build an assessment in our country. How to solve this problem?

There are two verified sources of information:

data from public companies around the world
information about M&A transactions not only in Belarus, but also abroad

As a result, you will receive an array of data for different companies, regions, etc. Now the task is to choose the correct peer companies on the basis of which you will make your assessment. For this you need:

1. Identify a broad sample of companies based on general criteria that characterize your company (industry, region, revenue, product or service).

Let's look at our company "A". Using data on public businesses, we will compile a list of companies involved in the production of shoes in Europe. Here are 11 companies that, in their main characteristics, are similar to ours.

2. The next step is to narrow down this list using niche criteria. This includes market share, level of competition, management team, growth potential, financial performance, etc.

In our example, we will adjust the sample based on financial indicators. Companies with revenue from $30 million to$ 150 million. So, we got 5 companies (highlighted in dark). Revenue figures are in $ million.

The next step is the choice of a multiplier, on the basis of which we will evaluate our company.

Historically, there have been 3 types of multipliers:

interval(determines the value of a company based on its performance and is the most common, such as EV/EBITDA)
moment(the value is determined based on the performance of the company at the reporting date, for example, from the statement of financial position)
branch(there are specific multipliers for each industry, for example, the number of wells for an oil company)

Suppose, as a result, you have a sample of 5 peer companies, and each of them has its own multiplier value. Next target- Based on the data obtained, determine the value of the multiplier for your company. For this you need:

1. Cut off extreme and/or unrepresentative values of peer company multiples.

After reviewing more detailed data, we found that the multiple for Fenghua SoleTech AG is not representative.

2. "Weigh" intermediate results

After analyzing the remaining companies, we came to the conclusion that based on the region, strategy, market share, financial indicators, we should use the following weights to calculate the multiplier.

As a result, we got that the multiplier for our company "A" is 6.296.

3. Make final adjustments(for example, discounts by region).

We must understand what fundamental dependencies affect the formation of the multiplier.

This dependence is expressed by a formula that at first glance seems terribly complex.

EV/EBITDA = f(G,Ke,MARG,T) = f(G,BETA,DUM,MARG,T)

In fact, this formula answers the fundamental question: “What determines the value of your company?”.

It depends on:

the marginality of your business, that is, the net profit margin (abbreviation "MARG")
from the country in which your company operates (indicated by the abbreviation "DUM")
from the industry in which you work (in our formula it is "BETA")
from the tax rate that falls on your company ("T" - in our formula)
the company's growth potential in the coming years (we use it as a G variable)
company's cost of equity (usually denoted by the symbol "Ke")

Thus, the company's value is influenced not only by internal factors (the amount of equity capital, profitability, etc.), but also by external ones - for example, the so-called "country risks".

Each country causes certain risks for the investor.

In the same way, industry risk is determined, which also affects the company's valuation.

Let's calculate the adjustments for our company "A". Initially, our multiplier was set at 6.296. Let's look at the risks: we can exclude some of the risks and variables, for example, the country risk, because practically all companies from Poland got into the field of our comparison.

If we assume that the profitability of our company is somewhat lower than the industry average in Poland, then we need to take into account the discount on profitability. In addition, Company A does not have audited accounts for international standards. In this connection, it is necessary to make a discount to our calculated multiplier.

As a result, our company will cost 5.91 EBITDA.

Thus, in the example of the conditional company "A", we see that the cost depends on many variables and contexts that are important to consider.

You can see how different estimates can differ for the same company on the Deal simulator.

All in all, valuing a company is as exciting as playing chess.

Viktor Denisevich

He is engaged in market analysis, financial due diligence, preparation of analytical data for the board of directors, actively participates in the development of financial models of strategies.

In 2013 he received the ACCA certificate (dipIFR). Currently undergoing CFA training.

Selling a business is a natural stage in the development of a company. And the success of a business project is directly related to the price that buyers are willing to pay for it.

Of course, the owner of the company is interested in the highest possible assessment of his business. In economic theory, his desire is abbreviated SDP (the sellers dream price). Literally - the ultimate dream of the seller. In contrast to it, there is the "10-50" rule, developed by Western appraisers. In Russian practice, it also finds application: the final cost of the company is usually 10-50% lower than that declared by the seller initially.

To minimize the difference between the seller's expectations and the buyer's willingness, it is important before putting it up for sale. There are many valuation methods, which entrepreneurs are unlikely to be able to delve into without the help of specialists. But you need to know the main ones in order to understand: a competent assessment of the company is the key to a successful transaction for its sale.

Evaluation based on the funds spent on the business

At first glance, the most obvious and logical method. The price of the company is equal to the amount of costs incurred. Operating expenses are taken into account - everything that you invested in the creation, development and operation of the business until it was sold. The number of staff and the volume of the wage fund are also important.

All data, of course, must be supported by reporting documentation. Therefore, this method of evaluation can be applicable only to the most legal business, in the management of which gray schemes are completely absent or their use is insignificant. In addition, your costs must be justified and understandable to a potential buyer. Unreasonable expenses incurred as a result of illiterate management will not add value to the business.

However, an assessment based on the summation of the funds spent can generally be considered conditional and can only be used in conjunction with other, more objective methods. The fact is that this method does not take into account the value of intangible assets, the so-called goodwill: the reputation of your business, ideas and developments. So the use of only this valuation method leads to an underestimated value of the business.

Valuation by total asset value

It is advisable to apply this method to a business that involves the ownership of large tangible assets. For example, industrial production or real estate. For an innovative business, where the price of tangible assets is not so indicative, this method, like the previous one, is inappropriate to apply: it does not take into account the cost intellectual property. Therefore, the company will be undervalued.

In addition, the first two evaluation methods they miss the influence of external and internal factors on the value of the business. For example, market conditions or cooperation with key partners - these nuances, of course, affect the company's value, but they will not be taken into account when assessing it using these methods.

Evaluation based on average market performance or taking into account the experience of competitors.

This method involves the use of so-called industry multipliers - formulas that calculate the average cost of a business for a particular area. For example, the average selling price of an insurance company is 120-150% annual commissions. The sale price of auto repair shops is made up of twice the monthly profit and the market value of the equipment. An online store can be evaluated by industry coefficients, based on sales volumes for six months and the cost of a license / permissions / accesses, if required.

And if not everyone is familiar with industry multipliers, then based on the experience of competitors, almost any entrepreneur can. This is perhaps one of the most accessible methods for non-professional appraisers.

It is enough to study open sources that contain information about the sale of an existing business. These sites can specialized companies, business printed editions. From ads for the sale of a business, you need to make a selection, which will include companies whose field of activity is similar to yours. Compare the number of ads for the sale of such a business with the number of applications for the purchase.

The well-known rule applies here: if supply exceeds demand, liquidity decreases, an adequate price cannot be high.

At the same time, remember: this method will allow you to get the average cost, it does not take into account the specifics of your particular business. It makes sense to extrapolate the experience of other market participants to your company with a number of reservations. So, you must clearly understand what your advantage over competitors is, what local features of doing business can affect its value. Obviously, the selling price of two similar companies located in different countries or even different regions of the same country can be very different.

Assessment according to the development plan for the next five years

It is logical to pay for the company as much as it will bring in the foreseeable future. To do this, the seller must provide a convincing and reasonable financial plan for the next five years. In other words, to analyze the discounted cash flows (discounted cash flow).

In fact, these are future cash receipts, the assessment of which is adapted to existing realities. The main parameters that are taken into account are the planned sales growth and business profitability. Of course, the predictions must be confirmed.

The method is based on a comparison of objective market factors and expert opinions. That is, to evaluate this method can only . But you, as a company seller, must clearly understand: how much your business earns, how long it will pay off, what needs to be done to achieve optimistic financial forecasts.

With a greater degree of probability, a potential buyer or investor may consider the resulting assessment to be disputable. Only a competent specialist in investment projects can competently answer objections here, or involve him in negotiations.

In order for the value of your company during the sale to be adequate and mutually beneficial, do not neglect the three universal rules

1. Use right away several techniques in determining the value of the business. Only together they can give an objective assessment of the company.