Formulas for calculating the market value of an organization. Model for express assessment of company value. Calculation method for determining the capitalization rate

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 value, 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, grounds for comparative analysis and disadvantages.

Discounted Cash Flow Method

Optimal: for fast-growing startups currently in their early stages of development with little or no revenue.

Not suitable: for technical and manufacturing companies.

Basis for assessment: The company's business value is assessed based on the total free cash flow of future periods. The value of the flow is discounted taking into account the potential risks that can be expected. The discount rate is approved based on the weighted average cost of capital.

Flaws: inflated price obtained as a result of calculations, very approximate assumptions (company revenue in the following periods, discount rate, rate of increase in sales).

Method of multipliers and coefficients

Applicable: for large, profitable firms with modest assets.

Does not apply: for organizations whose market share is insignificant.

Basis for assessment: comparison with publicly traded firms with identical financial and operational structures. How to estimate the value of a business for sale using this method? To do this, several indicators are used: average annual turnover, annual growth, EBITDA, EBIT. Transactions with similar organizations that were sold to financial investors come into view. A significant role is played by the comparison of the market price of a company's shares and its net profit per share. The audit reveals the development potential of the organization and the industry as a whole.

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

Net asset method

Optimal: for large firms with significant underlying assets.

Not used: for the small and medium enterprise sector.

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

Flaws: difficulty in determining the value of intellectual property.

Cost incurred valuation method

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

Not used: for startups.

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

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

The task of the analysis is to sum up all the costs “in a circle” and present them as an opportunity to evaluate a ready-made business “down 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 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. 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 per 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 applying marketing tools to it (an example is an email newsletter).

For an entrepreneur who has planned to attract investments or sell a share/entire enterprise, it is important to know how to evaluate a ready-made business, and it is advisable to follow recommendations, the purpose of which is to reach a compromise with the counterparty.

• Each method has its drawbacks. Maximum objectivity can be achieved only with an integrated approach that allows for mutual verification of calculation results.
• Choose the most appropriate assessment methods for your project and defend your opinion.
• Help the investor/buyer conduct due diligence on the organization and be prepared to provide a rationale for your strategy.
• The price of the same enterprise is different for different buyers; the audit does not end with just calculator calculations from the Internet.

How to evaluate an existing business when purchasing: help from First Broker

The specialists of the First Broker company will give you competent answers to the question of how to evaluate a ready-made business when purchasing, and, if necessary, will take responsibility for determining the market value of the project. Activities within the framework of the service are provided in a short time (from 5 days) at reasonable prices (from 15 thousand rubles). The confidentiality of the information received is guaranteed by contract.

If you're thinking about investing in a company or selling yours, it can't hurt to calculate the value of the company and make sure your investment will pay off. The market value of a company reflects investors' expectations regarding the company's future earnings. Unfortunately, it is much more difficult to value a business as a whole than smaller, more liquid assets, such as shares. However, there are a number of ways in which you can calculate the market value of a company, which accurately represents the actual value of that company. For simpler calculations, which will be discussed in this article, you need to find out the market capitalization of the company (the value of the company's shares and shares in the hands of shareholders) or analyze comparable companies. You can also determine a company's market value by using industry-wide multiples.

Steps

Determining market value based on market capitalization

Determine whether the market capitalization calculation is appropriate for estimating the market value of a company. The most reliable and understandable method for assessing the market value of a company is to calculate the so-called market capitalization, which reflects the total value of outstanding shares. To calculate market capitalization, you take the stock price and multiply it by the total number of shares outstanding. The resulting value will determine the overall size of the company.

• It should be noted that this method is only suitable for public companies where you can easily find these same outstanding shares.
• The disadvantage of this method is that the company's value is tied to market fluctuations. If, due to an external factor, the company's market value decreases, the market capitalization will also decrease, even if the company's financial condition has not changed.
• Since market capitalization depends on investor confidence, due to its volatility and unreliability, it is not recommended to be used to estimate the actual value of a company. Since calculating the value of a shareholding, and therefore the market capitalization, involves taking into account many factors, you should be skeptical about this figure. However, it is likely that any potential investor may have similar market expectations and may set similar values ​​for the company's earnings potential.

1. Determine the current market value of the stock. The market value of a stock can be found on many sites, including Bloomberg, Yahoo! Finance and Google Finance. Enter the company name and the phrase “share value” or the stock symbol (if you know it) into a search engine to find out the market value of a particular company. For our calculations, you'll need the stock's current market value, which is usually displayed prominently on the rate sheet page of any major financial website.

   Find the number of outstanding shares. After that, you should find out how many shares the company has issued. This figure reflects the number of company shares that are in the hands of shareholders, including internal (employees and directors) and external investors (banks and individuals). This information can be found either on the same website where you found out the value of the shares, or in the company’s balance sheet, under the item “fixed capital”.

   To determine market capitalization, you must multiply the number of outstanding shares by their current price. The resulting figure will be equal to the total value of all shareholders' shares, which fairly accurately reflects the total value of the company.

   • For example, we will calculate the market capitalization of Sander Enterprise, a fictional publicly traded telecommunications company with 100,000 shares outstanding. If the current price of each share is $13, then the market capitalization calculation would be: 100,000 * 13 = $1,300,000.

Determining market value based on comparable companies

1. Determine if this method is suitable for this purpose. This method of estimating the market value of a company is suitable if the company is privately owned or the market capitalization value for one reason or another seems to have nothing to do with objective reality. To estimate market value, compare the sales values ​​of comparable companies.

   Find comparable companies. When choosing comparable organizations, you need to tread carefully. It is advisable that the companies being compared are in the same industry, approximately the same size, and have similar sales and revenues. In addition, it is also desirable that the sales of the companies being compared are recent, that is, that they more or less reflect the current market situation.

2. Print the average value of the sales amount. When you find recent sales of comparable companies or estimate the sales of similar public companies, take the average from the sum of all sales. This average can be used to begin assessing the market value of your chosen company.

   • For example, let's imagine that 3 mid-sized telecommunications companies were recently sold at prices of $900,000, $1,100,000 and $750,000. The average value of sales is 916,000. Thus, the market capitalization of Anderson Enterprise worth 1,300,000 is a more than optimistic view of the value of the company.
   • If you wish, you can compare different values ​​based on their proximity to the target company. For example, if a company has the same size and structure as the company you are valuing, when calculating the average of sales, you may assign a higher value to it. You will find more information in the article “How to calculate a weighted average”.

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

Advantages and disadvantages of the income capitalization method

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

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

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

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

The formula for calculating income capitalization is as follows:

V ( Englishvalue) – business (project) cost;

I( Englishincome) - income;

R – capitalization rate.

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

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

What type of income should I choose for assessment?

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

sales revenue, then this indicator is taken as the capitalized base. It can be noted that various types of data can be used in the assessment ↓.

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

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

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

Net profit used to evaluate large companies.

Profit before taxes applied to small enterprises to exclude the influence of federal and regional benefits and subsidies in income generation.

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

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

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

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

Methods for calculating the capitalization rate

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

Calculation using the market extraction method

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

The capitalization ratio is calculated using the following formula:

R – capitalization rate;

V – company value;

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

V ai is the cost of selling the i-th company on the market;

n – number of similar companies.

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

Calculation method for determining the capitalization rate

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

Formula No. 1	Formula No. 2*
R – capitalization rate; based on projected profitability);	R – capitalization rate; r – discount rate (rate of return); g – the projected average growth rate of the company’s income ( based on historical income data).

*you can notice that the second formula corresponds to.

The most commonly used methods for estimating the discount rate are:

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

What is the difference between capitalization rate and discount rate?

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

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

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

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

Average revenue = AVERAGE(B6:C6)

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

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

Capitalization rate = discount rate – average growth rate

Capitalization rate = 18-15 = 3%

Company value = D6/C8

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

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

Conclusions

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

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

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

Business valuation methods

1. Comparison of profitability with the base rate

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

The base rate of return is an opportunity to place funds with virtually zero risk of loss. The risk premium is the additional desired return to the base rate, taking into account the risks you bear when buying a business (or a share in it).

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

An example of business valuation using this method:

The base rate is 7%. Risk premium – 2%.

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

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

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

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

The current return on investment in Lukoil shares is lower than required. Therefore, it is not worth buying shares.

At what price does it make sense to buy shares?

215 rub. / 0.09 = 2,389 rub.

This method does not take into account the market situation, as well as the processes occurring in the company. To make the forecast accurate, it is necessary to track the situation over several years. At the same time, it allows you to relatively quickly evaluate business performance and get an idea of ​​its expected profitability. The method can be used not only in the stock market, but also when purchasing a small enterprise or company.

2. Discounting method

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

On average, investments in an enterprise pay off in 5 years. So the forecast is made for five years. Discounting is carried out based on the postulate: Tomorrow's money is cheaper than what we have today. How much cheaper? By the amount of required profitability. If we want to recoup the investment in 5 years, then the required return on investment must be at least 20%.

An example of valuing an enterprise using the discounting method:

Initial data:

Estimated income by year:

1 – 200,000 rub.

2 – 250,000 rub.

3 – 310,000 rub.

4 – 370,000 rub.

5 – 440,000 rub.

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

1 – 200,000 rub. / 1 = 200,000 rub.

2 – 250,000 rub. / 1.2 = 208,333 rub.

3 – 310,000 rub. / 1.2 / 1.2 = 215,278 rub.

4 – 370,000 rub. / 1.2 / 1.2 / 1.2 = 214,120 rub.

5 – 440,000 rub. / 1.2 / 1.2 / 1.2 / 1.2 = 212,191 rub.

Enterprise value at current prices:

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

3. Costly method

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

4. Method of business valuation based on asset value

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

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

5. Analogy method

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

6. Substitution method

The option of creating a similar business from scratch is being calculated. After which a discount is made to the received price in order to interest the buyer in purchasing an already operating business.

Conclusion

As we can see, there can be many methods for calculating the value of a particular enterprise. It all depends on the flight of your imagination and your ability to negotiate with the buyer (if you are selling a business) or the seller (if you are buying). All methods are based on a compromise of interests. If you can present your business to an investor profitably, you will sell your business at a high price, but if you fail, you will receive very little for it or you will be left with “illiquid assets” on your hands.

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

Estimating the value of a company is an objective indicator of the results of its activities. Such a valuation includes an in-depth financial, organizational and technological analysis of the current activities and prospects of the company being valued.

Firm valuation or company is carried out by calculating the cost using several methods, resulting in the most reliable result being achieved. It is extremely important to evaluate a company to assess the effectiveness of management decisions, the selection criterion of which is to increase the value of the company. An assessment of the value of a company can be the subject of both an assessment of the market value of a company that is closed or not sufficiently open to the stock market, as well as an assessment of the property complex of the company as a whole, or the property complexes for the production and sales of certain types of its products (business lines). Company valuation pays special attention to the analysis of financial indicators that determine decisions on mergers or acquisitions of companies.

Firm valuation- one of the most significant and interesting areas in the valuation activities of our company. The accumulated experience allows us to accumulate the necessary data on sales of companies and organizations and develop approaches to assessing value that can be successfully used by both professional appraisers and financial directors of enterprises. The company's assessment is documented in the form of a report drawn up in accordance with the legislation of the Russian Federation.

The value of a company is an objective indicator of its performance. The value of a firm depends on what the valuation is for. There is no universal methodology in this area. The more precisely the purpose of the assessment is defined, the more successful the project for which it was carried out will be.

Firm valuation is carried out for the following purposes:

• when buying and selling a company or a block of its shares;
• upon liquidation of the company;
• during mergers and separation of companies;
• when applying for a bank loan secured by the assets of the company;
• in case of divorce;
• when concluding insurance contracts;
• when declaring bankruptcy;
• when issuing new shares and other securities.

The value of the company itself can take different forms:

• fair market value - that is, the value accepted by government agencies that is equally beneficial to both small and large shareholders and is close to the average market value of similar objects;
• investment value - i.e. the value of a given company for a given investor with all his plans, preferences, tax features, possible synergies and restrictions;
• internal, or fundamental, value (intrinsic, fundamental value), defined as an assessment obtained as a result of a careful and coordinated study of all characteristics of the company and market factors;
• going concern value, upon receipt of which the appraiser believes that the company will continue to operate indefinitely;
• liquidation value;
• book value or book value obtained on the basis of accounting documents about the company's assets and liabilities;
• real market value (market value), i.e. the price for which a company can be sold within a reasonable time on the currently available market.

It is also worth keeping in mind the differences that exist between firms of different legal forms: private firms are valued differently than small joint-stock firms, and differently than huge corporations whose shares are constantly traded on stock exchanges.

Methods for estimating the value of a company

Ability-To-Pay Method

Buyers evaluate how much a given company can service as debt if purchased with borrowed funds. Sellers use this method to calculate the maximum price that the cash flow generated by the company can support.

The logic of the method is as follows. The firm will produce a cash inflow of X rubles, available to pay for borrowed capital. This way, the buyer can borrow such capital, pay it back within a reasonable period of time, and then profit from the business. This means that the amount of borrowed capital is approximately equal to the price of the business. The calculation is made as follows. Forecast proforma cash flows are prepared for 7-10 years (or less, depending on the average payback period for capital investments in this industry and in this country). Outflows to maintain the business in working competitive condition are subtracted from the forecasted flows. The result will be a forecast of average cash inflows for maintenance and return of borrowed capital. On this basis, the amount that can be borrowed from the bank against this cash flow is calculated. Taking into account that the loan cannot exceed 75-85% of the total project amount, the total cost of the company is calculated.

Discounted Cash Flow Method

This method is used: when the purchase of a company is considered as an investment and is intended to be resold in a few years; when a company is bought with borrowed funds for the purpose of quick liquidation or resale; when a firm operates in a high-risk environment.

The calculation is made as follows. A cash flow forecast is drawn up for the entire period that the buyer intends to keep the company in his ownership. Business maintenance expenses, taxes and debt service expenses are deducted annually. The remaining yearly amounts are then discounted to today's date and added together. The resulting amount is added to the residual value of the assets expected at the end of the holding period and subtracted from the expected liabilities at that time. The result is close to the company's current price.

Capitalilzation of Income Stream Method

The method is applied to firms that produce sufficiently large after-tax income that can be attributed to a “goodwill” that exceeds the value of the firm’s assets. An “updated” forecast income statement for the next 12 months is prepared. Net operating income after taxes is divided by the required return that a potential investor would expect from any investment at that level of risk. All obligations of the company that the new owner of the company will assume are subtracted from the result. The result is equal to the value of the firm.

Excess Earnings Method

This method is used to value any profitable company. It is assumed that the company is worth as much as its assets are actually worth, plus its “good name” if the income is high enough.

Economic Value of Assets Method

The method is used for companies that are not particularly profitable, for companies with declining profitability, and also in cases where selling the company in parts is more profitable than its current operation. Independent experts estimate the real liquidation value of each asset separately, and the results are added up to form the price of the company.

Net Worth Per Books Approach

Rarely used. The price is determined by subtracting the amount of the firm's liabilities from the amount of its assets. This assessment is used as an additional argument in negotiations.

Internal Revenue Service Method

Used primarily to determine taxes on gifts, inheritances, etc. "Intangible assets" and liabilities are subtracted from the firm's assets. An additional stream of income from the “good name”, capitalized at the industry average “normal” rate, is added to the result.

Comparable Sales Method

It is used when there is reliable data on sales of similar companies, the financial documentation of which is available for analysis and verified by independent experts. Past transactions are compared with the company being valued and item-by-item refinements are made to answer the question: “How much would our company be worth if it were sold in the same way as its analogue?”

Price/Earnings Ratio Method

Mainly applicable to large joint stock companies whose shares are traded on the stock exchange. A number of similar companies are being selected. The ratio (C/E) of the market price of shares to earnings per share is calculated, and then the average value of these ratios. The after-tax net income generated by the company being valued is multiplied by the resulting average P/E ratio to give a version of the firm's price as the total price of all its shares.

Replacement Cost Approach

This method is used only for insurance purposes under the terms of a contract for full compensation of losses from an insured event. An independent expert estimates the cost of business restoration at current prices. An independent expert is needed because the concept of “full restoration” is not particularly clear.

Industry simplified approaches (Rule-of-Thumb Pricing Methods)

Some traditional industries have developed time-honored relationships that are often overly simplistic but are generally accepted in the industry. Although it is difficult to argue with such assessments, this must be done using other assessment methods.

Secured Loan Value method

It is used only as a method for calculating the amount of loan that can be raised for the further development of the company after its purchase. Each firm's asset is valued separately, and the amount is multiplied by the average by which the banking industry multiplies the value of the asset when accepting it as collateral.

To evaluate a company, you must provide the following documents:

1. Copies of constituent documents (Charter, Memorandum of Association, Certificate of Registration).
2. Copies of prospectuses, reports on the results of the issue of securities (for joint-stock companies).
3. Types of activities and organizational structure of the company.
4. Copies of lease agreements for real estate (if any).
5. Accounting data for the last 3-5 years (or a possible number of previous periods):
   • balance sheet
   • income statement
6. The latest auditor's report (if an audit was conducted).
7. Statement of fixed assets.
8. Inventory lists of property.
9. Data on all assets (real estate, inventories, shares of third-party companies, bills of exchange, intangible assets, etc.).
10. Decoding accounts payable.
11. Decoding of accounts receivable:
    • by terms of education;
    • by type of receivables;
    • share of doubtful debts.
12. Information on the presence of subsidiaries, holdings (if any), financial documentation on them.
13. company for the next 3-5 years, indicating the planned gross revenue for goods/services, necessary investments, costs, net profit - by year.

This list of documents is preliminary in nature and can be shortened or expanded after the appraiser has thoroughly familiarized himself with the assessment task and a detailed analysis of the specifics and condition of the company being valued.

The timing of the company assessment and the cost of services depend on their type. The result of the assessment is company valuation report.

If you need to evaluate a company, you can contact us using the contact information. Call us, we will help!