Evaluation of business value. Methods and principles of business valuation

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Analysis of the valuation of a business involves a certain, rather laborious process that helps the owner determine the value of a company, firm or some enterprise. It may be required in different situations. An assessment of the market value of a business may be required in one case or another, since the manager must know this indicator in order to make decisions related to the sale or acquisition of property rights. We can say that such an assessment is the result of the work carried out by the company throughout its existence.

Features

Business valuation is a concept that refers to the performance of certain tasks.

Initially, it consists in the analysis of a controlling stake in an enterprise or company. Solving this problem allows you to get the correct and most accurateidea of the price of the entire business.

After that, an assessment of the block of shares, called minority, is carried out. The complex of property is also evaluated. In this case, business assets are given special attention. As such, there are various buildings, structures, networks, vehicles, land, equipment. In addition to property, the financial routes of the company are also evaluated. In addition to all of the above, the market condition is also determined, as well as the state of the discount. This process is called the valuation of the company's shares listed on the market.

Business as a commodity

Estimation of the value of a business is carried out and subject to its perception as a commodity. When opening a company, a certain capital is invested in it, which must be returned in the future. Moreover, the object of business valuation, be it a company or an enterprise of any field of activity, must make a profit, otherwise there is no point in establishing it. Initially, it is not known how much income will be received, so the opening of any business is a risky undertaking. However, modern business valuation methods allow you to get information about future profitability in advance, after which you can make a final decision.

By itself, a business represents a certain system that can be implemented in the market framework as a separate element, a whole complex or a subsystem. A product can be referred to as either the whole enterprise or its individual elements. The mass of external and internal factors affects the level of profitability and needsspecific case.

It is customary to refer to the external unstable economic situation in the country, which happens quite often. This causes a certain instability of the business. The state is obliged to take this into account in the regulation of business processes. Often an enterprise is able to influence the market industry or the market as a whole. Therefore, he is able to influence the economic situation in the country.

Importance of assessment activities

Business valuation is a necessary and useful procedure. This can be proven by certain examples of what this procedure gives:

• with its help, business management can become much more efficient;
• it makes it easy to make certain investment decisions;
• Evaluation can produce a productive business plan;
• through business assessment, you can smoothly move on to the reorganization of the company;
• it can be used to determine how creditworthy a company is;
• assessment allows for tax optimization of business.

Methods for estimating the value of a business involve several stages. To begin with, documentation is collected that provides the necessary information about the company or enterprise. Next, an analysis and a complete study of the market on which the company's activities are based is carried out. At the next stage, it is time for settlement operations. Next, you need to approve the results obtained as a result of the previous procedure. And at the last step, a report is generated,which serves as a business valuation.

Basic techniques

An enterprise or firm is valued using three approaches: income, cost and comparative. You can describe each of them in general terms, and then consider in more detail.

The cost approach involves estimating the costs incurred by the business. Very often, the book value of assets does not correspond to the market price. In this case, the valuation of the enterprise is a thorough and detailed revaluation. This method has one advantage - it is based on real assets.

Comparative analysis involves comparing the valued business with a similar enterprise or company currently on the market. Information is consumed from transactions involving assets, stock markets and the takeover market.

There is also an income approach. The valuation of the business in this case is carried out after calculating the income expected from the operation of the enterprise. The main factor that determines the valuation of a business to a large extent is the profitability of the company. It turns out that the higher the profit, the higher the final assessment of the value of the business.

A bit of history

Assessing the value of an enterprise's business can be quite useful not only for the seller, but also for the buyer. There is some pretty interesting information that relates to this fact. This applies to those moments that were previously little known to anyone. That is why it is worth plunging into history a little.

Quite difficultdetermine when exactly valuation services in this area appeared, as well as who offered them for the first time. However, modern approaches to business valuation were laid back in the twenties of the last century in America. It was at that time that the United States came out with a ban on alcoholic products, which everyone knows, which caused a collapse in the alcohol market. At that time, it seemed that there was no point in valuing a business, but the economy would not have become a market economy if its participants had not looked for alternative ways.

It was necessary to evaluate the value of the alcohol business quite soon after the “wine and vodka” collapse. Many factories that were engaged in the production of alcoholic beverages received tax breaks from the state in 1920 for the damage that was caused to them. Of course, all companies were of different sizes, so the amount of benefits required was different, at the same time everything had to be justified by law so as not to leave anyone offended. It was at this time that an assessment of the value of the enterprise's business was required. It was then that terms were born that are still actively used, for example, “goodwill” or the cost of goodwill, which implied the valuation of intangible assets.

These principles of business valuation take into account a whole range of factors that give an idea of the future increase in the profitability of a particular company in comparison with the average performance of similar companies. Business valuation necessarily takes into account such important points as the company's reputation, brand recognition, advantageous location, and others. Even nowmost believe that such a study is based on such elementary concepts as debts and assets.

But we have become accustomed to the fact that valuation is often presented in a variety of forms, among which the most notable are measurements of the amount of money and income received through this business, received at the moment and expected in the future. However, when it comes to the value of business reputation, professionals try to take into account such things as the stability of the workforce, the brand name, as well as other equally important factors that can greatly affect the final results that a business valuation gives.

How did they start counting?

All these conclusions and innovations became the basis for a memorandum to be issued in America in the twenties, which set out fundamentally new ideas in business valuation. They also de alt with intangible value. It turns out that the modern principles of business valuation were laid down a century ago, and they turned out to be so reasonable that they spread all over the world, acquiring many fans, amendments, improvements, innovations and developments. It turns out that an expert assessment of a business is currently an important point for enterprises that care about the profitability of their activities.

So here is an example of a business valuation to better understand what is meant by this process. Suppose you became the owner of shares in some large company A. Of course, youinterested in the value of your shareholding. To do this, you will read newspapers, study information on the Internet to get an idea of \u200b\u200bthe value of shares, which will be appropriate to request if you want to sell securities. In this case, there is no assessment of the business of the enterprise.

Besides this, if we are talking about a private firm, then completely different laws apply here, unknown to an unscrupulous or inexperienced appraiser. Because of this, quite often there is confusion in the business valuation process itself, as well as errors specific to this process. Some of the most common myths in this area can be listed.

Myth one

Estimation of the value of the enterprise's business should be done only when it is ready for sale, or the creditor is required to carry out this procedure before seizing the property in order to secure the debt. Of course, this reason is the most common and important. If until such a moment there has never been an assessment of the value of the business, then you can be completely sure that its owner was not interested in issues related to minimizing property costs, planning land ownership, and others. If the business should continue to generate income in the future, then the owner should be interested in valuing it.

Myth two

The business owner knows that the value of doing business in this industry is equal to twice the company's annual income. Therefore, he is convinced that there is no need to hire an outsider to carry out an appraisal of the value of the business. Of course, similarindicators exist, and they are especially common among brokers, economic observers, and other professionals who are accustomed to making average lists, sticking to intermediate indicators even in such delicate matters.

But you should also decide what the “average” hides underneath? This term implies that some enterprises are below this level, and some are above. It turns out that the generalized statistics data are indicators for identifying certain outcomes, but they are not able to tell about a particular transaction.

Each individual business is different, so the valuation should be tailored to that particular case, using a specific project, and not according to some template. Otherwise, there is a high probability of disputes, omissions and inaccuracies.

Myth 3

Competitor sold his business 6 months ago for a price equal to three times the company's annual income. Your business is not worse, therefore, you are not ready to set a lower price for it. This myth also needs to be dispelled. Naturally, you need to be confident in yourself and your own business, but what happened six months ago cannot be relevant at the moment.

Estimating and managing the value of a business requires answering a few questions:

1. What is the current profit?
2. What is the planned profit growth in the future?
3. What is the ROI expected by potential buyers who have purchased your business?

During the assessment, it is very important to be aware not only of the company's internal losses and profits, but also of the overall economic situation, both within the country and the whole world. It turns out that the assessment and management of the value of a business involves taking into account not only local indicators and information from the accounting department, not only data on the closest competitors, but also more comprehensive and global facts.

Fourth myth

It is believed that the value of a business is directly dependent on the purpose of its valuation. Naturally, there is endless talk about some kind of one-sidedness and bias of the assessments. What is very profitable for the seller turns out to be disadvantageous for the buyer, and vice versa.

The purpose of business valuation is not to provide any benefit to a specific person, but to do everything objectively. Ideally, when conducting a qualitative assessment, you will receive the so-called market value of the enterprise. The cost can be called fair only when the buyer and seller have information about all the conditions of the transaction, and know what and how is currently happening on the market. At the same time, neither party should enter into an agreement under duress.

Only in this case, the valuation of the company's business will allow both parties to know everything they need. All justifications must be relevant to the current situation, as this expert opinion will no longer be forwarded by anyone.

Myth 5

If a business is making a loss, then there is no point in valuing it. Actually privatecompanies that are considered in the general mass may not be very profitable in comparison with their counterparts. When assessing, a study of all movements of the company's capital is carried out, which allows you to find out not only the amount of profit, but also the return on investment capital. This term refers to the ratio of net operating income to the average total capital that is invested in an enterprise or a certain type of activity, that is, the quotient of dividing net operating income by the amount of investment. This is a complex issue, the solution of which can not be mastered by every businessman. It is for this purpose that the assessment of the investment value of a business is usually carried out by third-party companies that have been specializing in this area for more than a year.

The seller, through an assessment of the company's business, will be able to convince the buyer of the legitimacy and legal literacy of the transaction, as well as justify the price he is asking. Do not forget only that these events should be carried out repeatedly.

Goals of business valuation

In this case, there are several most significant points. Through this assessment, the value of the firm can be determined. Many entrepreneurs have no idea how much their business can realistically cost. Appraisal companies can help resolve this issue.

The basics of business valuation are such that it allows a firm to find its market niche in which it will navigate well. Every businessman needs to know what's going on.business in the market, as well as how colleagues and competitors work, what consumers demand. It is the submission of information about the current situation that is one of the duties of firms that are engaged in business valuation.

Estimation and management of business value is required to identify the current financial position of the company, to make some kind of internal diagnosis, which must be listened to without fail in order to use the correct methods of treatment or prevention.

A conscientious entrepreneur is interested in holding such events, as they help not only broaden one's horizons, but also give an idea of the current situation in commercial circles. An valuation professional will provide you with full information on how the situation in the country and in the world is changing, in your industry, as well as what changes your company is undergoing, even if it is very conservative. You may be shown an example of a business valuation beforehand.

The information that is obtained during these activities is indispensable for use in courts, as well as in the regulation of issues that involve taxation or financing. The assessment carried out can become your reliable witness or indispensable assistant-consultant. An income approach can be used for this.

Business valuation, if conducted regularly, is useful in a situation where an urgent decision is required to buy, sell or merge companies. Sometimes it happens that all this information is required here and now, otherwise the dealcan break, so there is simply no time left to call appraisers and carry out their work. If you have documents containing information about the current assessment, then it will be quite simple to use them, you only need to make certain amendments to them.

Conclusions

Business is not a simple phenomenon that we face every day. Own enterprise is a business that requires not only financial, but also temporary, providing the present and future for you and your family. Therefore, it is important to carry out any assessment activities regularly, using professional resources for this, which set the necessary tasks for themselves.

Business valuation by real experts provides important and useful information that will come in handy in various situations. This may be the need to conclude a deal, the sale of a company, a dispute with the tax authorities or the search for investors for whom it is useful to know that your business can increase their capital, and here different approaches are used to assess the value of a business.