Business valuation. How to evaluate a business before buying it. Estimating the value of a company How to find out how much a business is worth

From this article you will learn:

• What is company value and why is it needed?
• What types of company value are there?
• How to calculate the value of a company
• How to quickly calculate the value of a company
• What are the features of company value management?
• How to increase company value

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

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

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

1. This provides objective data on the state of the business and efficiency administrative apparatus in him. By reacting to them, owners can always correct course in time.
2. 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.
3. Valuation makes it possible to take into account assets arising during the course of economic activity companies.

Of course, assessing the value is necessary not only for buying or selling a ready-made business. This indicator is important For strategic management company. A clear understanding of the value of your enterprise will also be required when releasing valuable papers, 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,
• not everyone tangible 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 a comprehensive analysis helps to calculate the real value of a company.



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

What are the different types of company value?

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

1. Market price.

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

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

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

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

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

1. 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.

1. 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?

1. Duplicates or copies constituent documents enterprises.
2. Documents on the inventory of company property.
3. Written confirmation of the company structure and types of its economic activities.
4. For joint stock companies, duplicate reports on the issue of securities and copies of prospectuses will be required.
5. Documentation on fixed assets.
6. If there is real estate for rent, then you need to provide copies of the contracts.
7. 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.
8. Final conclusion audit, if it was carried out at the enterprise.
9. A detailed list of all assets: tangible and intangible, in shares, bills, etc.
10. Decoding of receivables and payables.
11. If the company has subsidiaries, then it is necessary to collect information about them and provide financial documentation for them.
12. A ready-made business development plan for the next 3-5 years, containing potential gross revenue, investments, expenses and calculations net profit every 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 the performance of an 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:

1. Determining the value of the company was required to complete certain legal actions. In this case, they turn to a licensed independent appraiser, who draws up his conclusion in the “Appraisal Report”, regulated Federal law № 135.
2. 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 in the quality of the appraiser’s work, but in the cost of services and in the form of the conclusion. In the first case, the specialist must comply with the requirements current legislation regulating its 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 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, warehouse stocks, financial injections. Next, past and potential income, enterprise development plans, competition and the economic environment must be calculated. At the end of the comprehensive examination, the data is compared with information about similar companies, and only after this the real value of the company is formed.
For the above calculations, it is applied three methods:

• profitable,
• expensive,
• comparative.

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

1. For the income approach it is:

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

1. For cost approach are used:

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

1. For the comparative approach these are the methods:

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

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



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

• P = CFt/(1 + I)^t,

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

• P = СF (t + 1)/(I− g),

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

• P = (1 −L av) × (A −O) −P liquid,

Where P– company value,
P liquid– costs of its liquidation (such as insurance, services of a valuation expert, taxes, employee benefits and management costs),
ABOUT– amount of liabilities,
L avg– discount provided due to the urgency of liquidation,
A– the total value of all the company’s assets after their revaluation.
The results of calculations using the current formula are also influenced by the location of the enterprise, the quality of assets, and the situation on the market as a whole.

Quickly calculate the value of a company using an express assessment

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

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

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

• DDP 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 indexes i And j the serial numbers of periods (years) are indicated,
EV(Enterprise Value) – the value of the company,
D(Debt) – the cost of short-term and long-term debt,
FCFF stands for “free cash flow for the firm”, excluding debt financing, remaining after taxes (or operating cash flow),
E(Equity) is the amount of the organization’s own capital,
WACC(Weighted Average Cost of Capital) is translated as “weighted average cost of capital”, which is calculated as follows:

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

1. 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.
2. 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 practically meaningless. This happens because the meaning of the terms with the index i too small because of the denominator, and the imperfect calculation of the numerator has almost no effect on the final result of this calculation. For this reason, the following popular practice is used an approach:

• the company's value is divided into the forecast period and the post-forecast period;
• in the first period, cost factors are 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.

Valuing a company: common mistakes

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

1. 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.

1. 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.

1. 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?

1. Wrong statement of the problem.

The amount of the final cost that will be obtained as a result comprehensive analysis and calculations, largely depends on the correct formulation of the problem, on the accuracy and adequacy of the choice of the type of cost and on the final goals for which the 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.

1. 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.

1. Legislative shortcomings.

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

1. The cash flow forecast made based on the results of the analysis and the discount rate reflecting the costs of attracting third-party capital – with the income approach.
2. 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.
3. The adequacy of multipliers (price coefficients) and the comparability of the analogue company with which the comparison is being made – with a comparative approach.

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 for determining the market value of an organization, which are useful for both buyers and sellers to learn about.

Three approaches to business valuation

1. Expensive. This approach to business valuation involves adding up all the investments made. Provides application.

• Net asset method.
• Liquidation value method.

1. 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.

1. Comparative. It concludes the main approaches to business valuation. It involves determining the company's prospects in comparison with similar organizations. The following methods can be used.

• A capital market method based on the market prices of competitors' shares.
• A method of transactions, which is based on an analysis of the prices for the repurchase of controlling stakes in similar companies.
• The method of industry coefficients, which allows you to calculate the price of an organization based on industry statistics.

Six Business Valuation Methods

Below we will look at 6 methods for determining the price of a business project, talk about their advantages, areas of application, reasons for comparative analysis and shortcomings.

Discounted Cash Flow Method

Optimal: for fast-growing startups, in this moment those at an early stage of development, with little or no income.

Not suitable: for technical and manufacturing companies.

Basis for assessment: the company's business value is assessed based on total number free flow Money 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 have been sold come into view financial investors. A significant role is played by the comparison of the market price of a company's shares and its net profit per share. The audit reveals the development potential of the organization and the industry as a whole.

Flaws: labor-intensive search for an analogue, closed transactions, difficult process of data accumulation.

Net asset method

Optimal: for large firms with significant underlying assets.

Not used: for the SME sector.

Basis for assessment: balance sheet indicators of the company. One of the advantages of the method is a high-quality verification of the audit result in comparison with accounting documentation.

Flaws: difficulty in determining the value of intellectual property.

Cost incurred valuation method

Fits: to evaluate enterprises with large annual turnover and significant assets.

Not used: for startups.

Basis for assessment: The method is based on the premise that similar project can be launched by another businessman in a comparable time frame with similar costs. The analysis allows us to answer the questions:

• how much did the creation and development of the project cost;
• how much money was invested in development;
• how many people are on the company’s staff and what is the size of the wage fund;
• how much money was spent on renting premises, purchasing equipment, licenses and other assets.

The task of the analysis is to summarize all costs “per circle” and present them as an opportunity to evaluate ready business"to the money." In this case, the funds invested by the investor are considered the price of the additional share. For example, the stated costs are $2 million. In this case, an investment of 1 million dollars will raise the price of the project to 3 million dollars, the investor’s share will be 1/3 of the project that received the investment (that is, “after money”).

Flaws: the methodology is based on determining the minimum costs for the project and is unprofitable for the seller, since it does not allow taking into account intangible assets created in the process of activity in the form of ideas, utility models, inventions, etc.

Valuation method based on total asset value

Fits: for owners of large material assets: real estate, wells, mines, tunnels and industrial complexes.

Does not apply: for enterprises working with intangible assets and in the field of innovation.

Reasons for analysis: The principle of assessing the value of a business is based on the summation of all the assets of the company.

Flaws: there is a high risk of underestimating the project, since it is impossible to take into account 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 intangible assets by writing off money from the company's account, which is reflected in the expense column). However, it is incorrect to assume that the accounting balance sheet contains the entire list of intangible assets that the enterprise has. More often, the balance sheet shows only obvious intangible assets and their nominal value. The opposite extreme is an attempt to include in the rank of intangible assets functions and elements of the business: 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.

1. 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.
2. 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.
3. 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.
4. 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%.
5. Exclusive terms of cooperation with suppliers and contractors. The cost of a business in terms of income will be higher, the more favorably the organization differs from its competitors. This includes the discount percentage and terms of delivery of products that differ from the standard ones available to each market participant. Thus, a grocery store may have a supplier discount of 35% of the retail price and a payment deferment of 15 days, as opposed to the basic 25% and 5 days of deferment. The price of this asset is calculated depending on the objects of trade turnover according to these criteria: with a trade turnover of $5,000 per month, this kind of arrangement can bring a profit of $500 and another $50 if the proceeds are placed on deposit before the grace period expires. Over the course of a year, such arrangements will bring a profit of $6,600.
6. 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.
7. Office rental agreement. Having an office in a good location is beneficial in terms of customer traffic and cost square meter. This creates a separate intangible asset that can be sold to a new owner.
8. Web resources. The value of a business can also be assessed from the profit brought to the organization by traffic to the site. Your own online resource and public pages on social media are assessed based on the replacement principle (how much it costs to create and promote an analogue) or by the number of customer requests generated by the site per month. Knowing the amount of the average check will allow you to calculate the amount of revenue generated by the site. Please note that sites and groups are both assets and liabilities that have an expense component. Determining the costs per 1 request will allow you to objectively calculate the costs of promoting a resource - the result will be a conclusion about the potential of the service.
9. Client base. Forms a separate intangible asset if it is suitable for application to it marketing tools(an example is 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.

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

Modern methods of evaluating companies, admittedly, are not far from the classic book truths prescribed by Mason and Harrison. Business angels, private investors, venture capital funds and entrepreneurs still use ratios and multiples, discounted cash flows and net assets to value businesses. But which method is right for you?

General provisions

Estimating the value of a company requires a number of assumptions, in particular, the actual size of the market (young, emerging industries are especially difficult to “digitize”), as well as a financial forecast. Often, an entrepreneur's business plans may not coincide with the investor's vision.

Another subjective indicator is the degree of return required by the investor to cover all his risks. The earlier an investor “enters” a company, the higher the return he requires. On the most early stage development, only one company out of ten invested turns out to be profitable, notes Konstantin Fokin, president of the National Association of Business Angels. “I work closely with companies because I want the profitability of my portfolio to be your average, I expect that two out of ten portfolio companies can be successful,” says business angel Alexander Borodich about the realities of high-risk investing.

When assessing the market and companies, entrepreneurs rely on similar transactions that have already taken place, which will allow them to obtain an approximate multiplier and understand the size of the market. The investor makes the final decision on the value based not only on data from similar transactions, but also on his own intuition and the results of “bargaining” with the entrepreneur.

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

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

But an investor is unlikely to be satisfied with such an answer. “Business angels invest money in businesses; they do not finance research projects,” states Igor Panteleev, Executive Director National Commonwealth of Business Angels. Most often, private investors reject startups precisely because the young company lacks sales.

Discounted Cash Flow Method

Fits: For fast-growing, early-stage startups with little or no revenue.

Not applicable: to tech companies.

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

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

Method of multipliers and coefficients

Fits: For established and profitable companies with modest assets.

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

Minuses: difficulties in finding a suitable analogue, closeness of similar transactions, difficult process data collection.

Net asset method

Fits: For large companies with significant underlying assets.

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

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

Minuses: Difficult to value intellectual property.

Other methods for valuing companies

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

Competency Rule: the assessment of each party’s share is based on the professional skills and competencies of the company participants.

Greed factor: the amount of investment multiplied by the share of the director of the business is divided by the investment of the director himself multiplied by the share of the investor. If the resulting coefficient is from 5 to 8, the company’s valuation is adequate; if it is more than 10, the entrepreneur is greedy and gives investors too small a share.

Real experience

Sergey Toporov, senior investment manager at LETA Capital fund:

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

Most effective method appraisals are a method of negotiation. We understand the minimum, comfortable and maximum assessment of the project for us. Next, we communicate with the project and compare this assessment with the expectations of the founders. The figure we settled on is the real cost of the project today.

Margarita Vlasenko, project curator of the IT park in Naberezhnye Chelny:

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

Danila Nekrylov, analyst at Bright Capital fund:

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

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

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

The following scheme is also used to determine the project assessment range:

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

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The cost of an operating business is an objective indicator of the functioning of the enterprise and reflects the current value of benefits in the future from its functioning. This allows us to calculate the most likely price at which it could be sold on the open market. The question of how to assess the value of a business is of a practical nature and is of great importance for every entrepreneur at various stages of the company’s functioning.

How is a business valuation carried out?

First of all, it is necessary to determine the main goal of the process of calculating the value of a business. There are two possible options here.

First option- the cost is necessary to carry out certain legal actions. That is, you need to receive an official conclusion in the form of an “Appraisal Report”, which will be prepared by an independent appraiser licensed to carry out this procedure.

Second option– an assessment is carried out to determine how much your business is actually worth. To do this, you no longer need an “Assessment Report”, in accordance with the requirements of Law No. 135-FZ.

These options differ fundamentally not in the quality of the work the appraiser does, but in the results obtained. Valuation activities is a licensed type of activity. For this reason, it is subject to certain requirements from the current legislation. Fulfilling these requirements during the process of drawing up the Assessment Report, as a rule, causes an increase in the cost of the specialist’s work.

If the results of the work are presented not in the form of an official Report, but as a Conclusion, during the negotiations there is a detailed development and agreement on a clearly formulated assessment task. According to this task Appraisers will only carry out the procedures you specify that are required to resolve certain issues.

Business valuation is a procedure in which it is necessary to calculate the value of a business as a property complex that provides its owner with a profit.

The assessment takes into account the value of all company assets: machinery, real estate, equipment, financial investments, warehouse stocks, intangible assets. It is also necessary to take into account past and future income, possible prospects further development of the company, competitive environment and the state of the market as a whole. Based on a comprehensive analysis, the enterprise is compared with similar companies. After that, information about the real value of the business is compiled.

Methodology

To calculate enterprise value, three methods are used: costly, profitable and comparative. In practice, different situations occur, and each class of situations uses its own recommended methods and approaches.

To adequately select a method, it is necessary to classify situations in advance, determining the type of transaction, the features of the moment for which the assessment is carried out, and so on.

Certain types of businesses are most often assessed on the basis of commercial potential. For example, for a hotel the source of income is its guests. This source is subsequently compared with the cost operating expenses to determine business profitability. This approach is called profitable. This method is based on discounting the profit received from renting out property. The assessment results according to this method both land and building costs are included.

If a business is not bought or sold, there is no developed business market in this direction, for example, a hospital or government building is being considered, then valuation can be carried out on the basis of the cost method, that is, it will take into account the cost of construction of the building, taking into account depreciation and wear and tear costs.

If there is a market for a business that is similar to the one being valued, the market or comparative method can be used to determine the market price of the enterprise. This method is based on the selection of comparable properties that have already been sold on the market.

IN ideal conditions all three methods used should give the same value. But in practice, markets are imperfect, producers may operate inefficiently, and users may have imperfect information.

These approaches involve the use of various assessment methods.

The income approach includes:

• a cash flow discounting method aimed at valuing an existing business that will continue to operate. It is more often used to evaluate young companies that have a promising product, but have not yet earned enough income for capitalization.
• The capitalization method is used for those enterprises that, during capitalization, accumulated assets in previous periods.

The cost approach includes:

• liquidation value method;
• the net asset method, applicable in cases where the investor plans to significantly reduce production volumes or close the enterprise altogether.

The comparative approach includes:

• the method of industry coefficients, focused on the assessment of existing companies, which will continue to function in post-reporting periods.
• a method of transactions applicable in cases where it is planned to reduce production volumes or close an enterprise.
• capital market method, also focused on existing enterprises.

Methods of the comparative approach are applicable only when choosing an analogue company, which must be of the same type as the company being valued. Below we will briefly look at the use of basic methods for calculating business value.

Brief instructions

To calculate the value of your business in the forecast period, you need to use the discounted cash flow method. A discount rate is used to reduce future income to present value.

Then, according to the forecast, the business value is calculated using the following formula:

P = CFt/(1+I)^t,
Where I- discount rate, CFt denotes cash flow, and t– this is the number of the period for which the assessment is made.

At the same time, it is important to understand that in the post-forecast period your enterprise will continue to function. Depending on the future prospects for business development, different options are possible, from complete bankruptcy to rapid growth. For calculations, the Gordon model can be used, which assumes stable growth rates of profits and sales and equality of depreciation and capital investments.

In this case, the following formula is used:
P = СF (t+1)/(I-g),
Where CF(t+1) reflects cash flow for the first year of the post-forecast period, g– flow growth rate, I- discount rate.

This model is most appropriate when calculating indicators for a business with a significant sales market capacity, stable supplies of materials, raw materials, as well as free access to financial resources and a generally favorable market situation.

If bankruptcy of the enterprise and further sale of property is predicted, then to calculate the value of a business, you need to use the following formula:
P = (1-Lav) x (A-O) – Pliq,
Where P liquid– expenses for liquidation of the enterprise, L avg– discount for urgent liquidation, ABOUT– amount of liabilities, A– the value of the company’s assets taking into account revaluation.

Costs include insurance, taxation, appraiser fees, administrative expenses, and employee benefits. The liquidation value also depends on the location of the company, the quality of assets, the general market situation and other factors.

When assessing domestic enterprises, the date of assessment is of great importance. Linking settlements to a date is especially important in a market oversaturated with property in a pre-bankruptcy state and experiencing a shortage of investment resources.

The Russian economy is characterized by an excess of the supply of assets over demand. This imbalance affects the value of the property offered for sale. The price of a property in a balanced market will not be the same as the value in a depression. But investors and business owners will be primarily interested in the real value in a specific market in certain conditions. And buyers are focused on reducing the likelihood of losing money, so they require guarantees. When assessing the value of a business, it is necessary to take into account all risk factors, including bankruptcy and inflation.

In conditions of inflation, at first glance, it is best to use the discounted cash flow method for calculations. This is true only if the inflation rate is predictable. However, it is quite difficult to predict the flow of income in conditions of instability for several years in advance.