Classmates
From this article you will learn:
- What is company value and why is it needed?
- What types of company value are there?
- How to calculate the value of a company
- How to quickly calculate the value of a company
- What are the features of company value management?
- How to increase company value
A business exists not only to receive funds for the goods or services for which it was created. Business is also an investment. Many entrepreneurs make money by organizing and launching new companies with the aim of further selling them. Although this is far from the only reason for selling a business. When a company goes bankrupt or cannot solve its problems on its own, there is often a need to assess the value of the company before selling it. In this article we will talk about how to understand everything related to the value of your business and avoid difficulties.
Why is it necessary to know the value of a company?
Now the overwhelming majority of companies in Russia do not consider assessing the value of a company to be something necessary, and their owners often do not see the point in this until the business reaches high levels and in the public arena. Until then, the assessment is perceived as a reason for the owner’s personal pride.
There are actually about twenty economic goals for calculating the value of a company, but there are only three most important ones:
- This provides objective data on the state of the business and the effectiveness of the management apparatus in it. By reacting to them, owners can always correct course in time.
- It is impossible to approach investors for additional cash injections without information about the real value of the company, otherwise you risk not getting what you came for.
- Valuation allows you to take into account assets that arose during the economic activity of the company in an extremely correct and competent manner.
Of course, assessing the value is necessary not only for buying or selling a ready-made business. This indicator is important For strategic management company. A clear understanding of the value of your company will also be required when issuing securities, shares and entering the stock market. It is also significant that no investor will agree to invest their money where the company’s value has not been assessed.
Enterprise business valuation (business valuation)- nothing more than determining the value of the company as non-current and current assets which can bring profit to owners.
When conducting an assessment examination It is necessary to estimate the value of the company's assets:
- real estate
- equipment and machines,
- stocks in warehouses,
- all intangible assets,
- financial investments.
Business is an investment product. Any investment in a company is made only with a long-term view of returning funds with a profit. Since quite a lot of time passes between investments and income in business, to determine the real value of a company, a specialist analyzes its activities over a long period and separately evaluates:
- past, existing and future income,
- efficiency of the entire operation of the enterprise,
- business prospects,
- competition in the market.
Once this data is obtained, the company being evaluated is compared with other similar firms. Only comprehensive analysis helps to calculate the real value of the company.
Valuation of an enterprise or company is the process of determining the maximum probable price of a business as a product when it is sold to other owners. Moreover, any enterprise can be sold either entirely or in parts. The company, as the property of its owner, can be insured, bequeathed or used as collateral.
What are the different types of company value?
The activities of the appraiser are regulated federal standard “Purpose of valuation and types of value”(FSO No. 2), which defines several main types of value of any valuation object:
- Market value.
The market value of the property being valued, for example a business, is the most likely price at which it can be sold on the day of valuation under the following conditions: the alienation takes place on open market with the existing competition, the participants in the transaction act reasonably and have complete information about the subject of sale and purchase, and its value is not affected by any force majeure circumstances.
The market value of the company is required in the following cases:
- when the company’s property or the enterprise itself is seized for government needs;
- when the price of placed shares is determined, which the company buys by decision of the meeting of shareholders or the supervisory board;
- when you need to determine the value of a company acting as collateral, for example in a mortgage;
- when the size of the non-monetary part is determined authorized capital firms;
- when the owner goes through bankruptcy proceedings;
- when it is necessary to determine the amount of property received free of charge.
The market value of a company is used in all situations where tax issues, both federal and local, are resolved.
It is precisely this type of value that is always determined in purchase and sale transactions of a business or any part of it, since market value is the most objective indicator and does not depend on the wishes of the participants in the process, it corresponds to the real economic situation.
- Investment cost- the value of the company that is related to the profitability of the enterprise for specific investor under existing conditions.
This type of cost depends on personal investment requirements. Every investor invests his money in a business with the goal of making a profit in excess of the amount of invested capital, and not just the return of this “debt”. So the investment value of a company is calculated based on the expected income of the investor and the capitalization rate of these investments. This type The value of a company must be calculated when buying and selling a business, merging, or acquiring companies.
- Liquidation value.
This cost option is calculated in a situation where the company’s work is expected to end for some reason (for example, reorganization, bankruptcy or division of the company’s property). When determining the liquidation value of a company, they find the most likely price at which the company can be sold for the shortest possible time exposure, provided that the owner of the object of sale is forced to enter into a transaction to alienate his property.
- Cadastral value.
This is the market value approved and established by legislation in the field of cadastral valuation of real estate. It is this indicator that mass valuation methods should arrive at in the case of the cadastral value of an object. This type of value is calculated most often for property tax purposes.
What documents are needed to carry out an assessment of the company's value?
- Duplicates or copies of the constituent documents of the enterprise.
- Documents on the inventory of company property.
- Written confirmation of the company structure and types of its economic activities.
- For joint stock companies, duplicate reports on the issue of securities and copies of prospectuses will be required.
- Documentation on fixed assets.
- If there is real estate for rent, then you need to provide copies of the contracts.
- To assess the value of a company, it 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.
- Decoding of receivables and payables.
- If the company has subsidiaries, then it is necessary to collect information about them and provide financial documentation on them.
- A ready-made business development plan for the next 3-5 years, containing potential gross revenue, investments, expenses and calculation of net profit in each next year.
This is a preliminary list of documents that the appraiser will need to conduct an examination of the company’s value, however, it can be shortened or supplemented at the request of the specialist.
How to find out the value of a company
Obviously, one of the most objective indicators of performance existing business is its cost. It makes it possible to calculate the price at which a company can be sold on the open market in a competitive environment, or to predict the future value of the company's benefits. The question of how a company's value is assessed is a serious one. practical problem of high importance for any entrepreneur.
To obtain an adequate assessment, first of all it is worth define the main goal cost calculation procedures. The most likely options are:
- Determining the value of the company was required to complete certain legal actions. In this case, they turn to a licensed independent appraiser, who draws up his conclusion in the “Evaluation Report”, regulated by Federal Law No. 135.
- You need to find out how much your business is really worth on the market; in this situation, the official “Valuation Report” will no longer be needed.
The fundamental difference when carrying out these procedures is not the quality of the appraiser’s work, but the cost of services and the form of the conclusion. In the first case, the specialist is obliged to comply with the requirements of the current legislation regulating his licensed activities, and usually these requirements significantly increase the price for the work.
In the second case, you will need to independently develop and clearly formulate a task for the appraiser, listing all the procedures you are interested in, factors of the company’s value and parts of the business that are subject to examination. So, as a result, you will receive only the information you need.
Business valuation means calculating its value as a property complex, which leads to profit for the owner.
To calculate the value of a company, you need to take into account all its assets, intangible and tangible: real estate, technical equipment, cars, inventory, financial investments. Next, past and potential income, enterprise development plans, competition and the economic environment must be calculated. At the end of the comprehensive examination, the data is compared with information about similar companies, and only after this the real value of the company is formed.
For the above calculations, it is applied three methods:
- profitable,
- expensive,
- comparative.
However, in fact, there are so many situations that they are segmented into classes, each of which requires its own approach and corresponding method.
To use the most appropriate calculation method, you need to first analyze the situation, the circumstances at the time of assessment and other conditions.
For some types of business, the valuation of the company is usually carried out based on commercial potential.
For example, in the case of hotel business we deal with guests as a source of income for the company. In a method called profitable, it is this source that will be compared with operating expenses to assess the profitability of the enterprise. This method is based on discounting the profit from renting out the company's property. Finally, after the assessment, both the cost of buildings and land are included.
The company's value is assessed using cost method, when we are talking about a business that is not subject to purchase and sale, as is the case with government agencies or clinics. This assessment takes into account the cost of constructing the building, depreciation and wear and tear of the property.
Comparative method used when there is a market similar business. This is a market-based method of assessing value, which is based on an analysis of similar properties that have already been sold in other markets.
Hypothetically, all of the above approaches must give the same value. But in fact, market conditions are not ideal, businesses are often inefficient, and information is insufficient and imperfect.
Determining the value of a company in each of these approaches allows use of various assessment methods:
- For the income approach it is:
- capitalization method, which is used in the case of established companies that managed to accumulate assets in previous periods;
- method of discounting cash flow for a young business that will develop in the future. Used when the company has a potentially promising product.
- For the cost approach, the following are used:
- the net asset method – when it comes to reducing production volumes or closing a business on the initiative of the investor;
- and the company's liquidation value method.
- For the comparative approach these are the methods:
- transactions, which is used in situations similar to the conditions for applying the net asset method;
- industry coefficients, estimating operating enterprises that do not plan to close during the period after the examination;
- capital market. This method is also intended for “living” companies.
Please note that the last three methods are only valid if there is a similar business that matches the type of the valuation object, otherwise the analysis will not be indicative. Next, we’ll briefly talk about the use of these methods by which the value of a company is calculated.
If you require an estimate of cost for the forecast period, it will be determined discounting method cash flows . To bring potential income to current value, a discount rate is used.
In this scenario, the company’s value is calculated according to the following formula:
- P = CFt/(1 + I)^t,
Where P- price,
I– discount rate,
CFt- cash flow,
t– this is the number of the time period during which the assessment occurs.
Do not forget to take into account that in the period after the forecast, your company will continue to operate, which means that future prospects will determine a wide variety of options - from explosive growth of the enterprise to bankruptcy.
It happens that calculations are carried out using Gordon model, implying stable and systematic growth of sales and profits of the company, as well as equal volumes capital investments and the amount of wear.
For this situation, the following applies: formula:
- P = СF (t + 1)/(I− g),
in which 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 a large business with a large market capacity, stable supplies, production and sales, located in favorable economic conditions.
If bankruptcy of the enterprise and further sale of property is predicted, then to calculate the cost this formula is required:
- P = (1 −L av) × (A −O) −P liquid,
Where P– company value,
P liquid– costs of its liquidation (such as insurance, services of a valuation expert, taxes, employee benefits and management costs),
ABOUT– amount of liabilities,
L avg– discount provided due to the urgency of liquidation,
A– the total value of all the company’s assets after their revaluation.
The results of calculations using the current formula are also influenced by the location of the enterprise, the quality of assets, and the situation on the market as a whole.
Quickly calculate the value of a company using an express assessment
Express valuation model, which we will talk about in more detail, is based on the method of discounting cash flow for an enterprise that we already know. For convenience, we abbreviate this term as DDP method for the company. These concepts, as we remember, are used in the income approach to valuing a company.
This approach is divided into the following most common ones: assessment methods:
- method of calculating economic profit;
- DDP method;
- real options method.
According to a lot of information, both direct and indirect, the most adequate method for determining the value of a company is the DCF method. Provided that we choose to display the behavior of the stock market (for example, the capitalization of an enterprise according to its data) as a criterion for the effectiveness and expediency of the method.
It is important that The DDP method has several varieties, corresponding to different purposes and differing in techniques for calculating both the flow itself and the discount rate. We list the most popular varieties:
- DCF for equity joint stock company(Free Cash Flow to Equity);
- discounting of DP for the company (Free Cash Flow to Firm);
- and another type of cash flow discounting - for capital (Capital Cash Flow);
- Adjusted Present Value.
At the same time, the entire DCF method for an enterprise is based on this formula:
in which the indices i And j the serial numbers of periods (years) are indicated,
EV(Enterprise Value) – the value of the company,
D(Debt) – the cost of short-term and long-term debt,
FCFF stands for "free cash flow for the firm", excluding debt financing, remaining after taxes (or operating cash flow),
E(Equity) is the amount of the organization’s own capital,
WACC(Weighted Average Cost of Capital) is translated as “weighted average cost of capital”, which is calculated as follows:
r d– the cost of the company’s capital, which is borrowed,
t– income tax rate,
r e– the amount of equity capital.
When calculating the value of companies in Russia, it is often the following simplifications are introduced:
- Weighted average cost of capital WACC can be denoted as a discount rate – r. This move does not destroy the adequacy of the formulas, since for business in Russia the calculation WACC is not always possible. Because of this, analysts resort to other calculation options.
- And let's assume that the variable r is constant throughout all years. This is due to the fact that determining this indicator in Russia even for one specific year causes great problems and leads to methodological stupor. So, if we do not introduce such a simplification, then we will unreasonably complicate the entire model for express assessment of the company’s value.
As a result of all the above transformations we get the expression kind
Factors of company value within the described valuation model are any scalar quantities and vectors that affect the value of the enterprise in calculations.
Note that forecasting free cash flow for a firm for every year of an indefinite period is quite difficult and makes little sense. This happens because the meaning of the terms with the index i too small because of the denominator, and the imperfect calculation of the numerator has almost no effect on the final result of this calculation. For this reason, the following popular practice is used approach:
- the company's value is divided into the forecast period and the post-forecast period;
- in the first period, cost factors are forecast based on assumptions and plans for further development enterprises;
- in the post-forecast period of time, cash flows are estimated based on the hypothesis of a fixed rate of their growth throughout the entire period.
Valuation of a company: common mistakes
Anyone who has encountered valuation services knows perfectly well that exactly how they calculate it significantly affects the market value of the same business being valued. The resulting amounts may vary several times. Such results often lead to serious financial damage, conflicts and even litigation.
Let's call There are several main reasons for variations in the value of the property being assessed:
- Methodological errors.
Inadequate value is obtained as a result of calculation errors, as well as methodological inconsistencies in assessing the value of the company. Carefully study the experience and professional level appraiser.
- Intentional misrepresentation of value.
Unfortunately, to this day, a certain share of the market for assessment services for 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 opinion of an expert.
Although the assessment procedure is based on specific values and economically sound assumptions, the process remains largely subjective. So the outcome may depend on the appraiser’s personal view of the future of the market, financial capabilities and other factors of the company’s value. Deciding how to treat economic conditions, has to be accepted by the expert conducting the analysis himself. And he will not always be able to predict even the most seemingly predictable things. Judge for yourself: who could have predicted the development of the oil market at 66 dollars per barrel two or three years ago, and not at 25 or even the optimistic 30 dollars per unit?
- Wrong statement of the problem.
The size of the final cost, which will be obtained as a result of complex analysis and calculations, largely depends on the correct formulation of the problem, on the accuracy and adequacy of the choice of the type of cost, and on the final goals for which the entire procedure is carried out. It is not surprising that the same security can be valued at amounts that differ by 20 or even 50%. This is influenced, for example, by whether it is a minority or majority-owned company. Depending on the purpose of determining the value of the company, the calculation process is carried out differently.
- Distortion of official reports.
The management of some enterprises deliberately makes a discrepancy between real and official reporting. And distortion of this factor of the company’s value inevitably leads to incorrect assessment results. This problem is even more aggravated in the case when it is necessary to make payments for a business whose share is pledged when receiving loan funds. Banks prefer to work not with management reporting, but only with official ones, which significantly changes the assessment indicators.
- Legislative shortcomings.
Nowadays, experts in the field of valuation turn to three main methods of this procedure - cost, income and comparative. Official valuation standards state that the final calculation must take into account the results obtained in all three approaches. But these methods do not always correspond to the objectives of the examination.
List of factors to pay attention to, in order to clarify their meaning and receive comments from an expert assessing the value of the company:
- Cash flow forecast based on the results of the analysis and the discount rate reflecting the costs of attracting third-party capital - with the income approach.
- The cost of all intangible assets (including those that are not included in this category according to the law Russian Federation) – with a cost approach.
- The adequacy of multipliers (price coefficients) and the comparability of the analogue company with which the comparison is being made - with a comparative approach.
Business Cost Factors
If a person is able to evaluate an apartment or car himself, then when buying a business one cannot do without a qualified appraiser. And the point is not only that it will require specialized knowledge, but also that information about the state of affairs at the enterprise must be correctly extracted and correctly interpreted.
The “Ready Business Store” believes that the main factor in determining the value of an enterprise is its net profit, and not accounting profit, but the money that the owner can withdraw from the enterprise.
1. “First of all, the buyer should pay attention to cash flows and net profit,” says Sergei Kharchenko, head of the valuation department of the Ready-Made Business Store.
If there is no profit even in management reporting, it’s worth thinking about it.”
According to expert observations, there is a discrepancy between “white” and “management” accounting in absolutely all enterprises. Of course, companies strive to operate as legally as possible. But even the smartest ones manage to bring no more than 80% of their business “into the white”.
2. Sergey Kharchenko considers the second most important indicator affecting the value of a business to be the period during which the business will generate money.
After all, products may lose relevance, competitors may appear offering a better product, lease agreements may expire, or the territory production premises They will plan to build an overpass, like in the movie “Garage”.
Business in leased territories is cheaper and “returns” faster, but has more risks associated with the unreliability of the lease.
If the business is done on its own premises and equipment, then it is more expensive and takes longer to complete. But equipment and especially real estate themselves are liquid asset. They can be sold at a profit even if the business collapses.
Intangible assets.
Experts differ in their assessment of such a phenomenon as goodwill - the intangible assets of a company consisting of a brand, business connections, employee talent, own know-how, etc.
For small businesses, of course, goodwill is not as significant as in large corporations that spend huge amounts of money on brand promotion.
The share of goodwill in the value of, say, a bakery is small, although it still exists - reputation, culinary skills, recipes.
But there are cases when goodwill makes up a significant part of the value of the business. For example, the value of a company developing software, fundamentally depends little on rented space or your own computers. In this case, the most important thing is bright minds, the names of developers and managers, as well as their connections.
In other words, the company may not have large tangible assets, the book value of its property will be small, but it is able to generate significant financial flows. This often applies to information and consulting businesses. Such companies are worth much more than the totality of their assets.
The difference between the selling price of a company and the price of its tangible assets is precisely the value of this very goodwill. The only catch is that it is extremely difficult to determine goodwill in any other way - except in the circumstances of the sale of the company.
Business staffing.
An important factor in the formation of goodwill is total cost, or even business viability is labor collective enterprise, its qualifications and controllability. The entire business can depend on one person, and this is a huge risk.
There is a known case in insurance business, when the chief sales manager left the company after a change of ownership, and 40% of clients left with him, that is, almost half of the business. He had enough to found his own insurance company.
But we are not talking only about top managers, who can move on to other concerns and take away clientele. No less serious problems are fraught with the whims of the main car mechanic, Uncle Vanya, with golden hands, on whom the entire car service business rests.
It’s funny, but the fate of a dry cleaner can be decided by a stain remover with a salary of 6 thousand rubles. The profession is very rare, and without such a specialist, dry cleaning loses both its meaning and clients.
Business valuation methods.
Appraisers use sophisticated techniques, the essence of which is simplified as follows:
1. Market method - an analysis of similar transactions on the market is carried out, the necessary discounts and allowances are made depending on the specific circumstances of the business, and thus the value of the enterprise that you want to buy is determined.
This is the method that everyone uses when buying a home or car - based on the prices for a similar product on the market.
2. Restorative method - the business is valued at the amount that would be required to develop a similar business from scratch.
3. Income method - in this case, the income that the enterprise gives or will bring is considered.
Here the assessment is influenced by the period during which it is possible to “recoup” the funds invested in the purchase. Nowadays, the payback period for an acquired enterprise is considered normal for small businesses and is equal to one and a half years.
No one will sell a running business for less than 7-8 months' profit.
It is rare that a business is sold for more than two to two and a half annual profits.
According to Alexander Butov, manager of the investment banking department of the FINAM investment holding:
First of all, the value of a business is determined by the company’s position in the market and its revenue
Next come profitability and accounts payable
The profitability factor is important - the forecast of cash receipts for the future and the period during which the acquisition can pay off.
But in practice, says Alexander Butov, buyers often use their naive methodology: revenue is multiplied by profitability and the number of years in which the new owner wants to recoup the deal.
For some reason, three years is considered a normal period.”
The procedure for transferring “business ownership”.
The most ticklish and difficult question- how to give away money and take ownership of a new business. I really want there not to be too much or even an insurmountable distance between these two acts.
It must be said that there are indeed risks here, including criminal ones. There are risks of non-compliance with agreements, deception - some intermediary firms even offer physical security services to clients. But, as the experience of recent years shows, fraud in this area is becoming less crude and more elegant.
General trend- everyone tries not to violate the law, especially criminal law. Which, however, requires even more diligence from intermediary consultants who monitor the purity of the transaction.
Director of the legal department of the “Ready Business Store” Sergei Samsonov lists the following as the main risks:
Hidden off-balance sheet obligations of the company being sold.
With some sales schemes, old debts that the previous owner managed to hide - for example, bills not taken into account on the balance sheet, some guarantees, guarantees - may come out after the transaction. And the new owner cannot get away from them;
The risk of non-fulfillment of obligations under a business purchase and sale transaction, that is, non-payment of money or non-receipt of rights to the business, with a competent intermediary with a good reputation is, in principle, reduced to a minimum.
A normal intermediary studies the credit history of the company and collects security information. Usually he is responsible for all documentation related to the appraisal - after all, he must have an appraiser's license.
In some cases, the intermediary may, by agreement with the parties, undertake financial guarantees for the transaction, but this is extremely rare.
Procedure for transferring money.
1. First, an agreement of intent is signed between the buyer and the seller, then the buyer hands it over to the seller against receipt or makes an advance payment to his account.
2. After this, all declared business circumstances are checked.
3. When the decision is made, the buyer opens a letter of credit in favor of the seller.
4. Then a purchase and sale agreement for 100% share or shares is signed, depending on the legal form of the enterprise.
5. The bank allows the seller to access the funds of the letter of credit only on the basis of a signed and certified purchase and sale agreement and registered in tax office new founding document.
Sometimes, instead of a letter of credit, the buyer rents a safe deposit box, which is used for payment using the same mechanism: the bank gives the seller access to the safe deposit box upon transferring to the buyer documents certifying his ownership of the business.
It's easy to transfer money.
Purchase and sale procedure
From a legal point of view, there are four forms of buying and selling a business.
1. The first and main thing is to replace the founders in an LLC or CJSC - as in a legal entity that owns a business. This is a fairly simple method.
Its disadvantage is that the legal entity retains its old credit history under the new owner.
Unknown off-balance sheet liabilities may surface.
There is also a significant advantage: replacing the founders does not require receiving the entire package permitting documentation, licenses, if the business is licensed.
You just need to register changes in the composition of the founders with the tax office.
The business seems to remain untouched, with its pros and cons. It's just that the founders and owners are different people.
2. The second method is to create a new legal entity and transfer to it assets related to the purchased business.
Assets can either be sold or otherwise transferred.
When selling property from one legal entity to another, taxes naturally arise, which, however, can be minimized. The method is also simple, but also has a significant drawback.
The new legal entity must re-obtain the entire set of permits and licenses, if required. And this is a very troublesome matter.
According to experts, a couple of years ago it took three weeks to obtain all the documents for a beauty salon. A year later I had to spend five weeks. Now - almost three months. These are the results of the campaign to combat administrative barriers announced just two years ago. Three months ready-made enterprise will stand idle and incur losses without any business reasons. Because of bureaucratic harassment.
Knowing the situation, mediator-consultants proceed as follows. They create a legal entity ahead of time and get everything for it necessary documentation. This keeps downtime to a minimum. But in some cases it is impossible to obtain two permits for one case; you have to first disavow the old one and then wait for the new one.
3. The third form proposed by law is the sale of the enterprise as a property complex. But there are few such cases when an enterprise would be registered as a property complex.
On the contrary, often one legal entity has, for example, a car wash, two restaurants and a gas station, but only the gas station is sold.
Business purchase and sale transactions using this option occur extremely rarely. Although experts consider this method to be optimal, it practically eliminates all the risks described above associated with hidden off-balance sheet obligations or the need to obtain a bunch of new permits.
The three methods described are suitable for selling normally functioning enterprises. 4. There is a fourth one - for the endangered. This is a sale through liquidation. We are talking, of course, about friendly bankruptcy. Relatively speaking, the buyer and seller come to an agreement, the seller initiates the liquidation procedure of the enterprise, its property is described, sold at auction, where it is acquired by a new owner.
True, there is a risk that another bidder will come and beat the price. But experts say that if everything is done correctly, the transfer of the business to the right buyer is guaranteed. This mechanism is suitable for small, medium and large businesses.
Why are intermediaries needed?
The most important thing in this area is consultation, assessment, information, support. No sane investor would buy a business relying only on his own ingenuity.
Familiarity factor for Russian business remains very important. Both the buyer and the seller often need recommendations from third parties who are personally familiar with the parties.
A fairly large proportion of transactions go through without this. That is, a normal market situation becomes common, when the seller and buyer initially know nothing about each other.
The intermediary brings them together, helps with pre-sale preparation, often acts as a business consultant and helps clean up the business.
He also evaluates the enterprise, makes inquiries about high-level contracting parties in the interests of each of them, provides legal support and sometimes even resolves security issues.
The services of an intermediary consultant cost 2-15% of the transaction amount - all intermediaries emphasize that their approach is purely individual. Moreover, the seller pays for them.
The fact is that sales are carried out from the set of offers that is formed by the sellers, which is why the intermediary has to be paid. However, no one is stopping the buyer from paying for the services of an intermediary.
Taxes should also be included in the costs that arise during the transaction. A smart intermediary will, of course, help minimize them. The fact of buying and selling a business in itself is not an object of taxation.
Taxes arise if property is transferred during the transaction. Or if the business was sold by purchasing shares or shares and the purchase price exceeded the nominal value - this difference is considered the income of the seller and is subject to income tax - 13%, if we are talking about individual.
It is clear that in the case of an LLC, a 100% share of the enterprise can be valued at 10 thousand rubles at par of the authorized capital, but the business can cost $100,000. That is, the difference between the face value and the market price will be $99,700 and should be taxed as income to the seller.
Often the parties take legal risks, underestimating the formal value of the business, or agree to share the burden of taxes.
Now there are dozens and even hundreds of offers for the sale of a business on the market. Not only factories and ships are for sale, but also small enterprises that can be managed by an ordinary person with at least some business acumen.
This market may also be of interest to existing entrepreneurs who want to diversify their business.
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.
- Transaction method, which is based on the analysis of redemption prices controlling stakes shares of 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 at the 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 number of free flows cash 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. Comparison plays a significant role market price the company's shares and its net income 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 value intellectual property.
Cost incurred valuation method
Fits: for evaluating 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 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 the total value of assets
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 the competencies, quality and potential of staff 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 IA 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 balance sheet shows only obvious intangible assets and their nominal price. 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 higher the cost of a business in terms of income, 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. So, a grocery store may have a supplier discount of 35% of retail price and deferment of payment for 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. Availability of office in good place 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 estimated 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 principle of replacement (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 refer to both assets and liabilities that have consumable part. 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 only be achieved with integrated approach, which allows you to organize 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.
Selling a business is a natural stage in a company’s development. And the success of a particular 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 maximum highly appreciated of your business. IN economic theory his aspiration is denoted by the abbreviation SDP (the sellers dream price). Literally – the ultimate dream of a seller. In contrast, 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 what was initially stated by the seller.
It is important to ensure that the difference between the seller's expectations and the buyer's readiness is minimal 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 a company is the key to a successful sale transaction.
Assessment based on funds spent on 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 the moment of its sale. It also matters staffing level and the volume of the wage fund.
All data, of course, must be supported by reporting documentation. Therefore, this method of assessment can be applicable only to the most legal business possible, in the management of which gray schemes are completely absent or their use is insignificant. In addition, your expenses 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 funds spent can generally be considered conditional and used only in conjunction with other, more objective methods. The point is that this method does not take into account the value of intangible assets, so-called goodwill: the reputation of your business, ideas and developments. So using only this valuation method results in an undervalued business.
Valuation based on total asset value
This method is advisable to apply to a business that involves the ownership of large material 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 use: it does not take into account the cost of intellectual property. Consequently, the company will be undervalued.
Moreover, the first two estimation methods miss the influence of external and internal factors on business value. For example, market conditions or cooperation with key partners - these nuances, of course, affect the value of the company, but they will not be taken into account when assessing it using the specified methods.
Assessment based on market averages 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 for an insurance company is 120-150% annual commission. The selling price of auto repair shops consists of double the monthly profit and the market value of the equipment. An online store can be assessed by industry coefficients, based on sales volumes for six months and the cost of licenses\permits\access, 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.
Enough to study open sources, which contains information about the sale of an existing business. These can be websites of specialized companies, business printed publications. From advertisements for the sale of a business, you need to make a selection that will include companies whose field of activity is similar to yours. Compare the number of advertisements for the sale of such a business with the number of applications for purchase.
The well-known rule applies here: if supply exceeds demand, liquidity decreases, and an adequate price cannot be high.
Please remember: this method will allow you to get an average cost; it does not take into account the specifics of your 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 is over your competitors, what local features of doing business can affect its value. Obviously, the sale price of two similar companies located in different countries or even different regions of the same country, can differ significantly.
Assessment according to the development plan for the next five years
Paying for a company as much as it will bring in the foreseeable future is logical. To do this, the seller must provide convincing and justified financial plan for the next five years. In other words, conduct an analysis of discounted cash flows.
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 planned sales growth and business profitability. Of course, forecasts must be confirmed.
The method is based on a comparison of objective market factors and expert opinions. That is, evaluate using this method can only . But you, as a company seller, must clearly understand: how much your business earns, how long it will take to pay off, and what needs to be done to achieve optimistic financial forecasts.
More likely potential buyer or the investor may consider the resulting estimate to be controversial. Only a competent specialist in investment projects can competently answer objections here, or involve him in negotiations.
To ensure that the value of your company upon sale is adequate and mutually beneficial, you should not neglect three universal rules
1. Use immediately several techniques when determining the price of a business. Only together can they give an objective assessment of the company.
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