What will happen after the final victory “over the investor”?
The fact is that “On Valuation Activities” does not allow calculating business value “in advance” so that the so-called “valuation date” will be in the future. But in the past, as much as you want, and rightly so!
That’s right … because we cannot predict with high probability how this or that enterprise will develop in the conditions of the Russian, and what is there to hide, world “turbulence”. But, nevertheless, you can make some forecasts regarding the value of the enterprise (business)!
In this case, we will rely on the methodology for assessing the enterprise (business), which, despite its prostate (not to be confused with a vital organ) and banality, is available to any layman.
This does not mean that there are no “nuances” in it and it is as simple as three dimes! There are nuances everywhere. It is just necessary to make an amendment to the fact that without certain knowledge and skills, it is quite easy to come to an inadequate price that does not reflect modern ideas of “the value of a business” as such …
If very briefly, the methodology for assessing business value includes 3 approaches: costly, market, and profitable. Let’s dwell on each of them.
Typically, evaluators in their reports regarding approaches write about the following:
cost approach – a set of methods for assessing the value of the valuation object1, based on determining the costs required to restore or replace the valuation subject, taking into account its depreciation;
comparative approach – a set of methods for assessing the value of the valuation object based on a comparison of the valuation object with similar objects for which there is information about the prices of transactions with them;
income approach – a set of methods for assessing the value of the valuation object, based on the determination of expected income from the valuation object.
As part of the costly approach
The method of calculating the value of net assets.
According to the method of calculating the value of net assets, all assets of the enterprise (fixed assets, stocks, receivables, financial investments, etc.) are measured at market value. Further, the liabilities of the enterprise (accounts payable, borrowed funds, etc.) are deducted from the amount received, the value received is the market value of the equity of the enterprise.
Note:
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In fact, everything is simple and clear. One caveat … The “assets” also include funds in the current account received from the maintenance of FCD. And in theory, if the enterprise will operate with a profit, then every month there should be more and more money.
But business owners are also people. People with a specific, sometimes perverse view of how to do business! And I have no doubt that in most businesses that after 3, and after 5 years, the current account will have a figure close to zero, and all profits will be “ruthlessly withdrawn” to meet other needs. Very different.
In this regard, the use of this method in evaluating a business “in advance” in most cases can be extremely unproductive, unless … The business will have significant assets in the form of real estate.
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Even in the Alt-Invest software product version 6.0 “business value at the end of the forecast period”, when calculating the financial part of a business plan, considers only one profitable approach (discounted cash flow method).
If, nevertheless, you try to consider it “costly”, then you need to make a lot of “assumptions and restrictions”, and in the final part, “coordinate” the approaches used by “weighting factors”. Somehow, not otherwise.
As part of a comparative approach
The market method – is based on the analysis of information about the prices of transactions of sale of objects similar to the objects being evaluated or similar to them in any way.
Such an analysis consists of four main stages:
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collection of information;
analysis of its reliability and applicability;
conclusion on the value of the evaluated object;
assessment of the accuracy of the result.
Note:
This approach is rarely used, since it is difficult to find information on the purchase / sale of a business even a little bit similar to the estimated one, and even more so, to find out the true price of the transaction. This is usually insider information!
But, this approach is applicable when it comes to small boutiques, service companies, etc. Information on similar businesses for sale can be easily found on the Internet on specialized sites (for the purchase / sale of businesses).
It’s not easy to introduce decreasing or increasing ratios, as some of the businesses for sale have their own “skeleton in the closet”.
As part of the revenue approach2
The method of discounted cash flows is based on the assumption that a potential investor will not pay for this business an amount greater than the current value of future income from this business. The owner will not sell his business at a price below the current value of the projected future income.
