BUSINESS COST ASSESSMENT – CALCULATIONS THAT YOU CAN’T AVOID
First of all, it is necessary to determine the main goal that the business value calculation process has. There are two possible options.
The first option – the cost is necessary for the implementation of certain legal actions. That is, you need to receive a formal opinion in the form of an “Evaluation Report”, which will be prepared by an independent appraiser, who is licensed to carry out this procedure.
The second option – an assessment is carried out to determine how much the value of your business in reality. To do this, you no longer need the “Evaluation Report”, as required by Law No. 135-FZ.
These options have a fundamental difference not in the quality of work that the evaluator performs, but in relation to the results obtained. Valuation activity is a licensed activity. For this reason, certain requirements are imposed on it by the current legislation. Fulfillment of these requirements in the process of compiling the Assessment Report, as a rule, causes an increase in the cost of the specialist’s work.
If the results of the work are not drawn up in the form of an official Report, but as a Conclusion, the detailed elaboration and coordination of a clearly formulated assessment task takes place during the negotiations. According to this task, the appraisers will perform only the procedures you specify, which are required to solve certain issues.
Business valuation is a procedure in which you need to calculate the value of a business as a property complex that provides its owner with a profit.
The valuation takes into account the value of all the company’s assets: machinery, real estate, equipment, financial investments, stocks, intangible assets. It is also necessary to take into account past and future revenues, possible future prospects for the company, the competitive environment and the state of the market as a whole. Based on a comprehensive analysis, a comparison of the company with its peers is carried out. After that, information about the real value of the business is already being formed.
To calculate the value of the enterprise, three methods are used: cost, income and comparative. In practice, there are different situations, and for each class of situations their own recommended methods and approaches are used.
For an adequate choice of the method, it is necessary to classify the situations in advance, determining the type of transaction, specifics of the moment for which the assessment is carried out, and so on.
Certain types of enterprise are valued most often on the basis of commercial potential. For example, for a hotel, a source of income is guests. This source is subsequently compared with the cost of operating expenses to determine the profitability of a business. This approach is called profitable. This method is based on discounting the profit received from the rental of property. The evaluation results according to this method include both the value of the land and the value of the building.
If a business is not bought and not sold, a developed business market in this direction does not exist, for example, a hospital or government building is considered, then the assessment can be carried out on the basis of the cost method, that is, it will take into account the cost of building the building, taking into account depreciation and wear.
If there is a market for a business that is similar to the one being assessed, a market or comparative method can be used to determine the market price of an enterprise. This method is based on the selection of comparable objects that have already been sold on the market.
Under ideal conditions, all three methods used should give the same value of value. But in practice markets are imperfect, manufacturers may not work efficiently, and users may have imperfect information.
These approaches involve the use of various assessment methods.
The income approach includes:
method of discounting cash flow, focused on the assessment of the existing business, which will continue to operate. It is more often used to evaluate young companies that have a promising product, but have not yet managed to earn enough income for capitalization.
capitalization method is used for those enterprises that accumulated assets in previous periods during capitalization.
Assistance in the selection of financial services / organizations
The cost approach includes:
liquidation value method;
the method of net assets, applicable for those cases if the investor plans to significantly reduce the volume of output or close the enterprise altogether.
Comparative approach includes:
sectoral coefficient method, focused on the assessment of existing companies, which will continue to function in post-reporting periods.
transaction method, applicable in cases where it is planned to reduce the volume of output or close the company.
capital market method, also oriented to existing enterprises.