Which method will give more reliable data on the value of the enterprise. On the "accuracy" and reliability of the results of determining the fair value of economically significant enterprises. The equity capital of the company is equal to
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HIGHER PROFESSIONAL EDUCATION
« INDUSTRIAL INSTITUTE »
Department of real estate valuation
EXAM MATERIALS FOR THE DISCIPLINE
«BUSINESS VALUATION AND FIRM VALUE MANAGEMENT»
Department of real estate valuation,
Head department ___________/A.A. Belan /
APPROVE
Reviewed and approved at the meeting
Department of real estate valuation,
economics and finance,
Protocol No. ___ of "_____" __________ 201_
BUSINESS VALUATION AND VALUE MANAGEMENT EXAM QUESTIONS
1 Business, enterprise, firm, capital as objects of assessment.
2 Features of business, enterprises, firms as objects of assessment.
3 Subjects of assessment. The need and purpose of business valuation.
4 cost. Types of value determined in the evaluation. Factors affecting the estimated value.
5 Principles of business valuation.
6 Approaches and methods used for business valuation.
7 Time estimate of cash flows. The main functions of the monetary unit and their economic meaning.
8 Provisional valuation of money capital. Turnover functions of the monetary unit and their economic meaning.
9 System of information used in the evaluation process. Requirements and organization of information. Internal information required for the assessment and its main sources.
10 External information needed for the assessment and its sources.
11 Inflationary adjustment of reporting under evaluation. Purpose, methods of correction.
12 Normalization of financial statements in the evaluation process. The purpose and directions of the normalization of financial documentation.
13 Transformation of financial statements.
14 Calculation of relative indicators in the evaluation process. Main groups of indicators.
15 The essence of the income approach to the valuation of an enterprise (business) using the discounted cash flow income approach.
16 Cash flows. cash flow models. Determining the duration of the forecast period.
17 Retrospective analysis and forecast of gross sales proceeds. Analysis and forecast of expenses and investments.
18 Methods for calculating the amount of cash flow for each year of the forecast period.
19 Discount rates. Methods for determining the discount rate. Calculation of the current values of future cash flows in the forecast period. Making final amendments.
20 Economic content of the profit capitalization method of the income approach and the main stages of its application. Analysis of financial statements.
21 Capitalization rate and models for its calculation.
22 General characteristics of the comparative approach to business valuation and its basic provisions. The main methods of business valuation by a comparative approach.
23 Basic principles for selecting enterprises - analogues in business valuation by the company - analogue method (capital market method). Distinctive features of financial analysis in a comparative approach.
24 Characteristics and calculation of price multipliers when evaluating a business using the analogue company method (capital market method).
25 Business (enterprise) valuation using the transaction method and the industry-specific method.
26 The essence of the cost approach in business valuation. The main methods of the cost approach. Stages of calculating the value of a business (enterprise) using the net asset value method.
27 Determination of the fair market value of the company's real estate using the income approach.
28 Determining the reasonable market value of real estate using a comparative (market) approach.
29 Determining the reasonable market value of real estate property using the cost approach.
30 Assessment of the market value of land. Essence, methods.
31 Valuation of the market value of machinery and equipment using the cost approach.
32 Assessment of the market value of machinery and equipment by a comparative (market) approach.
33 Valuation of the market value of machinery and equipment using the income approach.
34 Valuation of intangible assets and their group. Essence, features.
35 Application of the income approach in the valuation of intangible assets.
36 Application of the cost approach in the valuation of intangible assets.
37 Assessment of the market value of financial investments: bonds, shares.
38 Evaluation of inventories, deferred expenses, receivables, cash.
39 Scope of the salvage value method. Stages of liquidation value calculation.
40 Valuation of controlling and non-controlling interests.
41 Report on the assessment of the business of enterprises and the requirements for it.
APPROVE
Reviewed and approved at the meeting
Department of real estate valuation,
economics and finance,
Protocol No. ___ of "_____" __________ 201_
Head department ___________ / A.A. Belan /
TESTS FOR FRONTIER CONTROL FOR THE DISCIPLINE BUSINESS EVALUATION AND COMPANY VALUE MANAGEMENT
1 option
1. When analyzing costs in the DCF method, the following should be taken into account:
a) inflation expectations for each category of costs;
b) prospects in the industry, taking into account competition;
c) interdependencies and trends of past years;
d) the expected increase in product prices;
2. The cost of the appraisal object in case the appraisal object must be alienated within a period less than the usual exposure period of analogues is:
a) replacement cost;
b) salvage value;
c) book value;
d) investment cost;
e) disposal cost.
3. Does the size of the enterprise affect the level of risk?
4. The appraiser indicates the date of appraisal of the object in the appraisal report, guided by the principle:
a) compliance;
b) utility;
c) marginal productivity;
d) changes in value.
5. The method of "proposed sale" comes from the following. assumptions:
a) in the residual period, the depreciation and capital investments are equal;
b) in the residual period, stable long-term growth rates should be maintained;
c) the owner of the enterprise does not change;
6. Which method will give more reliable data on the value of an enterprise if it has recently emerged and has significant tangible assets?
a) salvage value method;
c) income capitalization method.
7. If the discounted cash flow method uses debt-free cash flow, then investment analysis examines:
a) capital investments;
b) net working capital;
c) change in the balance of long-term debt;
8. What is the capital market method based on:
a) under evaluation minority stakes shares of peer companies
b) on the evaluation of controlling stakes in companies-analogues;
c) on the company's future earnings.
9. Which of the following methods are used to calculate the residual value for a going concern?
a) the Gordon model;
b) the "presumed sale" method;
c) by the value of net assets;
10. For a debt-free cash flow, the discount rate is calculated:
a) as the weighted average cost of capital;
b) the method of cumulative construction;
c) using the capital asset valuation model;
11. Is the statement true: for the case of a stable level of income for an unlimited time, the capitalization ratio is equal to the discount rate?
12. When the growth rate of the enterprise is moderate and predictable, then the following is used:
a) discounted cash flow method;
b) income capitalization method;
c) net assets method.
13. What method can be used to determine the value of a non-controlling stake:
a) the method of transactions;
b) the net asset value method;
c) the capital market method.
14. Transformation of reporting is mandatory in the process of assessing an enterprise.
AT judicial practice two different approaches to determining the value of the share of a member of a limited liability company. These approaches are especially clearly visible when applying paragraph 2 of Art. 26 of the Federal Law "On Limited Liability Companies", according to which, upon withdrawal of a participant from the company, it is obliged to pay the participant the actual value of his share, determined on the basis of the financial statements of the company for the year during which the application for withdrawal from the company was filed.
A number of decisions of district arbitration courts indicate that the amount of funds due to a participant withdrawing from the company should be determined solely from accounting data (decisions of the Federal Arbitration Court of the East Siberian District in case N A74-1594 / 03-K1-F02-584 / 04 -С2, Federal Arbitration Court of the West Siberian District in case N Ф04 / 14-2239 / A27-2003, Federal Arbitration Court of the North-Western District in case N А26-5712 / 02-13, Federal Arbitration Court of the Urals District in cases N F09 -1115/04-GK and F09-40/04-GK, Federal Arbitration Court of the Central District in case N A54-2921/02-C9-C8-C17). This approach can be called the "accounting" method of determining the value of the share.
A different approach is set out in the decisions of the Federal Arbitration Court of the West Siberian District in case N Ф04-7802 / 2004 (6012-А03-13 and the Federal Arbitration Court of the North Caucasus District in cases N А32-10056 / 2003-17 / 207 and А53-15243 /02-C4-11). When adopting these judicial acts, the courts proceeded from the need to verify the reliability of the company's accounting data, comply with the requirement for mandatory revaluation of fixed assets, and take into account market prices for property (for convenience of presentation, we will call this approach "market").
In accordance with paragraph 16 of the decision of the Plenum of the Supreme Court of the Russian Federation and the Plenum of the Supreme Arbitration Court Russian Federation dated December 9, 1999 N 90/14 "On Certain Issues of Application of the Federal Law "On Limited Liability Companies", if a participant does not agree with the size of the actual value of his share determined by the company, the court checks the validity of his arguments, as well as the company's objections to on the basis of the evidence presented by the parties, provided for by civil procedural and arbitration procedural legislation, including the conclusion of the examination carried out in the case.Thus, in this matter, the highest judicial instances also proceed from the "market approach".
We believe that it is this approach that is in line with the law, although, at first glance, it does not correspond to the letter of the law (Article 26 of the said Law).
By virtue of Art. 94 Civil Code RF, when a participant withdraws from a limited liability company, the participant must be paid the cost of a part of the property corresponding to his share in the authorized capital of the company, in the manner, in the manner and within the time limits provided for by the law on limited liability companies and the constituent documents of the company.
Consequently, when determining the amount of funds to be paid to the retiring participant, the value of the company's property is first determined (of course, the company's debts should be excluded from the total value of the property), and then the part of the value due to the participant. The value of property is understood as its real market value, since the Code does not provide for the use of another type of value in these respects, and in all those cases where the use of other types of value (balance sheet, residual, nominal, etc.) is expected, the legislation specifically stipulates this.
Thus, both the value of the share of the departing participant and the value of the company's property are determined in the prices of one category - in market prices.
Incidentally, Art. 26 of the Federal Law "On Limited Liability Companies", pointing to the use of the actual value, does not exclude the use of the "market approach". In general, if it were not for the wording of this article, it is unlikely that anyone would try to prove that the market value is not the real value of the property, but the real one is the market one. These concepts are identical, and such a representation exists not only in economics, but also in law.
Commenting on Art. 1105 of the Civil Code of the Russian Federation, which also refers to the actual value, A.L. Makovsky (one of the developers of the code) points out that "the value of the property to be returned, determined "at the time of acquisition", must be "valid"" (paragraph 1 of article 1105). This obviously means the value of the relevant property for which, at the time of its receipt by an unjustly enriched acquirer, it could be bought in open market trade" *(1) .
According to Art. 7 of the Federal Law "On appraisal activities"(the title of the article is "Assumption on the establishment of the market value of the appraised object") if the regulatory legal act containing the requirement for the mandatory appraisal of any appraisal object, or the contract on the appraisal of the object does not specify a specific type of value of the appraised object, the establishment the market value of this object shall be subject to the said rule shall also be applied in the case of use in the normative legal act of terms not provided for by this Federal Law or valuation standards that determine the type of value of the object of valuation, including the terms "actual value", "reasonable value", "equivalent cost", "real value" and others. Thus, this law proceeds from the fact that the concepts of "real" and "market" value coincide, the organization is obliged to determine the market value as of the end of the year.
Of course, this law regulates only relations in the field of valuation activities. However, it is difficult to find arguments in favor of the fact that when making an assessment, the actual price should correspond to the market price, and in other cases it should not. Without a doubt, there are no obvious obstacles to applying in the interpretation of Art. 26 of the Federal Law "On Limited Liability Companies" the conclusion about the coincidence of the concepts of "actual" and "market" value by analogy (Article 6 of the Civil Code of the Russian Federation).
It should also be noted that according to Art. 94 of the Civil Code of the Russian Federation, the law on limited liability companies determines only the procedure, method and terms for paying the cost of a share, but not its size. And the norms of civil legislation contained in other laws must comply with this Code (clause 2, article 3 of the Civil Code of the Russian Federation). Thus, if we proceed from the fact that the law on companies establishes a different amount of payments than the Civil Code of the Russian Federation, i.e. the code is to be applied, that is, these sizes should be determined on the basis of market prices, and not according to balance sheet data.
In our opinion, there are no contradictions between the code and the law, at least they are not essential. This becomes apparent if one pays attention to the order in which the actual value is established.
By virtue of Art. 1 of the Federal Law "On Accounting" all organizations must ensure the formation of complete and reliable information about their property status. Article 12 of the said Law establishes that in order to ensure the reliability of accounting data and financial statements, organizations are required to conduct an inventory of property and liabilities, during which their presence, condition and assessment are checked and documented. An inventory is mandatory, in particular, before the preparation of annual financial statements.
Obviously, only the information that reflects the value of the property at which the property can be sold, i.e. the market value, can be recognized as reliable information about the property status.
This is also expressed in by-laws. So, in paragraph 41 of the order of the Ministry of Finance of the Russian Federation dated October 13, 2003 N 91n "On approval of the Guidelines for the accounting of fixed assets" states: "Revaluation of fixed assets is carried out in order to determine the real value of fixed assets by bringing the initial cost of objects fixed assets in accordance with their market prices and reproduction conditions as of the date of revaluation.
Thus, when preparing annual financial statements, which are used in determining the actual value of property, the company must draw up a balance sheet based on the inventory, and it, in turn, must be based on market prices.
It is worth paying attention to how the issue of determining the amount of payment to a participant in organizations of other forms is resolved. Legislation, the same rules as in relation to a limited liability company, are established in relation to other forms of organizations, in particular a general partnership (Article 78 of the Code), production cooperative(Article 111 of the Code, Article 18 of the Federal Law "On Agricultural Cooperation").
Special rules apply in joint-stock companies. The legislation does not provide for the possibility of withdrawing from a joint-stock company, however, it contains an institution similar to the payment of a share to a company member - the redemption of shares at the request of shareholders (Article 75 of the Federal Law "On Joint-Stock Companies").
The joint-stock legislation unequivocally indicates the necessity of applying the "market approach". So, in paragraph 3 of Art. 75 of the said Law says: "The redemption of shares by the company is carried out at a price determined by the board of directors (supervisory board) of the company, but not lower than the market value, which must be determined by an independent appraiser without taking into account its change as a result of the company's actions that led to the emergence of the right to demand evaluation and redemption shares". According to Art. 77 of the Law, in cases where the buyback price of a company's issue-grade securities is determined by a decision of the board of directors (supervisory board) of the company, it must be determined based on their market value.
It should be noted that the deviation from the "market approach" is contrary to the principles of equality of participants and the requirements of fairness and good faith (Articles 1 and 6 of the Civil Code of the Russian Federation). When calculating the value of a share based on the balance sheet value of the company's property, which differs significantly from its market value, the withdrawing participants find themselves in an unequal position with the remaining participants, whose share in the event of liquidation of the company will be proportional to the value of the company's property received from the sale of property at market prices, regardless of accounting data.
The determination of the value of the share paid to the retiring participant without taking into account the market value of the property creates grounds for abuse, violation of the interests of not only the retiring participants of the company, but also the company itself, since if the value of the property is overestimated, the company will be forced to pay the retiring participant more than he is due. So, if the value determined by the balance sheet is doubled compared to the market value, the withdrawing participant who owns a 50% stake in the authorized capital must be paid the market value of the entire property of the company. In this case, the company will be forced to sell all the property in order to pay off the participant who owns only 50% of the share in the authorized capital, and the rest of the participants will be left with nothing.
Judicial practice shows that the use of the "accounting" method often violates the balance of interests of the participants leaving the company and the company (the participants remaining in it). This can be justified by the need to stimulate entrepreneurship. This justification is not entirely correct. Imagine yourself as a person thinking about where to invest your money. Would you dare to transfer your money to an organization, knowing that when you leave it, you can be returned much less than the organization earns from your funds? In addition, you will have to wait at least six months, or even all of one and a half months, for a refund (if you file an application for withdrawal on January 1, 2006, the payment of your share due to you may be delayed until June 31, 2007). Also remember that during the period from January 1, 2007 to June 31, 2007 you will not receive any payment for the use of the money due to you. It should also be borne in mind that you should not count on the decency of your debtor. It is likely that by the date of determining the actual value of the property, the amount of net assets will be as close as possible to zero due to the efforts of the head of the company and other interested parties. In addition, from the moment you submit the application, you will lose the rights of a member of the company, and therefore the possibility of even minimal control over the activities of the company. It seems that the answer to our question is obvious, if you are not an altruist, a limited liability company in your eyes has a meager investment attractiveness. Sorry, there is one exception. If you are the leader of a society, the attractiveness of the latter rises sharply.
The “rupture” of legal relations in the period between the filing of an application for withdrawal and the determination of the amount of funds to be paid to the withdrawing participant also seems absurd. The rights of a member of the company are terminated from the moment of the application, but it is premature to talk about the occurrence of a monetary obligation to pay the cost of the share, since the amount of payments has not been determined. No less ridiculous is the fact that the determination of the amount of a monetary obligation depends on the debtor (he can influence the amount of the debt both through "incorrect" accounting and by withdrawing property from the company's possession). Is it possible to imagine that the buyer determines the value of the purchased item. Hardly. But in the relationship between the retiring participant and society, for some reason this is considered normal.
As we can see, even the application of the "market approach" does not guarantee the observance of the rights and interests of the departing participant. "High technologies" of minimizing net assets make it possible to leave a participant who has left the company "at nothing". It seems necessary to make such changes in the legislation that would reduce the "risk" of a participant's exit from the company. These changes may relate either to the introduction of certain control over the activities of the company by the departing participants, or the preservation of the rights of the participant until the cost of the share is paid in full, or the determination of the value of the share of the participant as of the date of the last (before submitting the application for withdrawal) balance sheet.
In our opinion, the termination of the rights of a participant should entail the emergence of a monetary obligation, and for the time of using the funds, the company must pay interest corresponding to the bank interest rate.
In the interests of society, an installment payment may be established, the establishment of certain restrictions on the amount of payments. So, it can be envisaged that the company sends for settlements with retired participants cash in the amount of net profit, but is obliged to pay the cost of the share in full within a certain period.
Yu.V. Shirvis, Chairman of the Judiciary of the Federal Arbitration Court of the North Caucasus District
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purchase, use or sell. When using the transaction method, the value of the enterprise at the level of the controlling stake is also obtained, since this method is based on the analysis of the acquisition prices of controlling stakes in similar companies.The value of the non-controlling (minority) stake is determined using the capital market method, since this method is based on information about stock quotes on world stock markets.
The comparative approach is based on three:
The capital market method is based on the use of market prices for shares of similar firms.
Which method will give more reliable data on the value of an enterprise if it has recently arisen and has significant tangible assets?
as the weighted average cost of capital2. by the method of cumulative construction
3. using the capital asset valuation model
171. When the growth rate of an enterprise is moderate and predictable, then the following is used:
1. discounted cash flow method
2. capitalization of income
3. net asset method
172. Which can be used to determine the value of a non-controlling stake:
The capital market method is
The ancestor of fractal market analysis is Benoit Mandelbrot, who described the theory in his book, co-authored with Richard L. Hudson (Un) obedient markets: ... ... WikipediaVALUATION OF AN ENTERPRISE - (BUSINESS) (English business (corporate) valuation) - the activities of experts in the systematic collection and analysis of data necessary to determine the value of various enterprises, types of business (any type of activity or equity participation in ... ... Financial and credit encyclopedic dictionary
VALUATION OF FINANCIAL INSTITUTIONS - (eng.
The capital market method is based on the valuation of minority stakes
All rights to the security belong only to the bearer. The release is made in electronic or paper form. The issuing company may not know who holds the shares and how much. No separate transfer of ownership is required.2. By type of issue in joint-stock companies:
— a placed share is a security that has already been placed among shareholders.
Valuation of a company is necessary in a variety of situations when: buying an enterprise or a large block of its shares, attracting investors, analyzing the quality of management, obtaining loans. The economic literature describes in detail the existing methods for assessing the value of a company, however, in their practical application, serious mistakes are often made that entail negative consequences. In this article, we will look at the most common mistakes in estimating the value of a company, as well as ways to minimize them.
Wrong choice of approach to valuation
In world practice, there are three main approaches to determining the value of a company: profitable, comparative and costly. Each of them is based on different points of view on the formation of business value. Results from these approaches are reconciled by calculating a weighted average. At the same time, the greatest weight should be assigned to the approach, the application of which uses the most complete and reliable information.
Example 1
Assume that for the valuation of the holding company "X" as the main approach used income approach. The activity of this company is to manage blocks of shares. The bulk of revenue is generated by individual production companies that are part of the holding. At the same time, the predominant part of their net profit is reinvested. As a result of the activity, the income of the parent company turned out to be small, which affected the result of applying the approach. Since this approach was used as a priority, the calculated value of the company turned out to be underestimated.
To avoid errors in the calculation of the value of companies, it is necessary to take into account the compliance of the approaches used with the objectives of the assessment and the degree of reliability of the information used in each of the approaches.
First of all, when choosing a priority approach, one should take into account way to benefit the owner of the business. If the owner makes a profit directly from the sale of goods or services, then the income approach will be a priority. For asset management companies, as in the example above, it makes more sense to use cost approach.
Via income approach it is possible to justify the value of the business, but not to carry out its initial assessment, which is discussed in the negotiation process. Cost approach also does not allow to determine the exact amount, since the cost of most assets is understated relative to the cost of creating similar assets. Comparative approach it is preferable when evaluating enterprises, transactions with shares or shares of which are regularly made on the exchange or over-the-counter market. However, it is also very prone to errors when using it. The fact is that each business has many unique characteristics, so complete and reliable databases of real sales are needed, which most appraisers do not have.
Each activity should use any of the above principles for choosing one or another approach to estimating value, except for those that obviously cannot be applied in specific conditions. At the same time, the following should be recognized: in practice, priority is given to data obtained using the income approach (in the market ready business the investor pays for the income).
Note. The underlying market information used in each approach does not correlate with the underlying market information used in the other approaches, and therefore each approach produces a unique result.
Mistakes when using the income approach
Often in our country, the income approach is applied incorrectly. The main difficulty in using this approach lies in the fact that enterprises apply various schemes for minimizing tax liabilities, as a result of which the enterprise's statements do not reflect its actual financial position. Almost every company has certain ways of avoiding taxes, which are problematic to take into account when assessing. When analyzing the income of an enterprise, first of all, it is necessary to find out the real price of selling products that are not on the balance sheet, and when analyzing expenses, take into account the actual cost of acquiring raw materials and materials, as well as the real wages. In this case, the accuracy of the estimate will depend on how well the appraiser understands the status quo. Therefore, it will be beneficial for business owners to provide the appraiser with additional information that goes beyond the official one. Otherwise, the value of the company will be significantly underestimated.
The value of the company determined by the income method, shows how much the buyer will have to pay so that the income from the transaction is equal to his costs. This amount is the upper limit from which to trade. When calculating the final price, the reasons why the enterprise may not reach this limit are discussed, and depending on the significance of these reasons, the price is reduced.
The income approach cannot be applied to unprofitable enterprises. Exceptions can be:
- new companies, which are sometimes valued using profit forecasts;
- unprofitable enterprises, considered taking into account the benefits that a specific investor can receive from their ownership (synergy effect, more rational use of certain assets, etc.).
It should be borne in mind that the assessment using the income approach is carried out on the basis of not only the income of the enterprise, but also other economic benefits received by the owner from owning the business.
In addition, in practice, problems often arise related to the calculation of the cost of a business. discounted cash flow method. Due to the lack of complete information, many companies everywhere use a simplified version of the calculation of cash flow, which leads to a distortion of the estimate. For example, a company's cash flow is often taken as the amount of its net profit after tax and depreciation accrued over a certain period. At the same time, the need to finance the company's current assets may not be taken into account, capital costs are forgotten, and atypical one-time income and expenses that arose in the current period may be included in profit, which generally distorts the amount of cash flow and the result of the assessment.
Measure a business with a metric reduced net income possible, but not in every industry. For example, in the jewelry industry, the amount of working capital is twice the amount of capital investments, and if you do not take into account the change in working capital in the company's cash flow, you can get a result that is far from the real one. However, when calculating the future value of, for example, a consulting company, a simplified approach may be justified.
Thus, when calculating the value of a company using the discounted cash flow method, it is necessary to strictly follow the method of calculating cash flow accepted in international financial practice. If it is impossible to obtain reliable information about all components of the company's cash flow, other approaches to valuation should be used, for example, comparative.
Note. The availability of information on the structure of the cash flow of peer enterprises can help calculate the approximate amount of cash flow for the company being valued.
Very often in valuation practice there are errors associated with incorrect forecasting of future cash flows. Often, when forecasting revenues, business salespeople tend to talk about high sales growth rates, keeping silent about the fact that the company has poorly developed strategy, marketing and assortment management. In addition, companies with a pronounced seasonality of activity may either underestimate or overestimate their need for working capital in separate periods. This is due to the fact that to calculate the change in the need for financing the production and financial cycle, balance sheet data at the beginning and end of the financial year are used. Meanwhile on new year holidays and periods of summer holidays in many sectors of the consumer market, there are recessions or, conversely, peaks of activity. Accordingly, the levels of inventories, receivables and payables during this period are not representative of the normal state of their business.
To avoid errors in the calculation of the forecast cash flow, it is necessary to check the forecasts of the state of the markets in which the company operates. The volume of income planned to be received in future periods must be clearly related to reasonable ideas about the volume of sales and the level of prices for the relevant products (services) in these periods. expedient building a scenario forecast of income. If the business of the company being valued is subject to strong seasonal fluctuations, then it is recommended to evaluate the change in the need for financing the production and financial cycle on a monthly basis.
Mistakes when using a comparative approach
Comparative approach is a general method for determining the value of a company and/or its equity capital, which uses one or more methods based on comparing the company with similar investments already sold. This approach includes the capital market method, the transaction method and the industry coefficient method.
Comparative approach is a procedure for comparing actual sales of similar properties that have taken place.
This assessment approach is based on principle of substitution, according to which, in the presence of several goods or services with relatively equal consumer value (utility), the most common and in demand will be the product with the lowest price. The comparative approach is based on the collection of information about similar offers and sales for subsequent comparison, which allows you to determine the necessary market adjustments for significant factors. Sales information is compared with the object under consideration according to the essential characteristics identified in this object. The peculiarity of applying this approach to enterprises is that when buying and selling a company, the buyer receives a minimum of information about the transaction. Accordingly, even if the cost of the sold analogue enterprise is known, it is difficult to say what specific factors formed it, whether there were any “pitfalls” and mutual obligations of the seller and buyer hidden from prying eyes. Also, this approach has limited application due to the uniqueness and specifics of enterprises. The problem is that, unlike most other products, an enterprise cannot be accurately compared - revenues depend on the unique characteristics of the company, few companies have enough common economic features.
We have to admit that it is especially difficult for businesses to find relevant information about the cost of an analogue. Estimating the value of your business by the sale price of a similar neighboring business, it is easy to make a mistake. Even if the transaction price and total sales are known, other key data (such as the level of profitability of the business) are often not available. And small variations of this indicator can significantly change the final price.
Comparative Approach to Valuation involves multiplying certain indicators of peer companies (sales volumes, profits, net assets or non-financial performance indicators) by a certain multiplier that reflects the ratio between the indicator under consideration and the value of the company. The multiplier can be industry-specific or calculated for individual peer companies.
Note. Currently, the owners of domestic companies often use multipliers used in Western markets. But, as the experience of domestic appraisal firms shows, they do not work in Russia.
For example, the value of telecommunications companies can be determined based on data on the number of telephone lines owned by the company. While cellular companies, when buying mobile operators, first of all take into account the number of acquired subscribers.
Example 2
One of the existing Russian market mobile operators as the main characteristic of the company's valuation widely uses such an indicator as the cost of one subscriber (the amount of the transaction per one subscriber by the acquired company). The motivation for using this indicator is as follows. Firstly, the indicator is simple and convenient, and secondly, it reflects the structure client base cellular companies, which is fairly homogeneous and overwhelmingly consists of individuals. In addition, the cost of connecting a subscriber to a mobile operator is the same. While the client base of wireline operators is much more heterogeneous. Here, the main subscriber and the main source of income is business sector. In addition, the costs of connecting a subscriber seriously depend on his location, connection method, etc. So, in order to connect a new area (if we are talking about the residential sector), you need to lay several kilometers of cable, put up a station, build a distribution network, negotiate with the developer, etc. Therefore, such an indicator as the cost per subscriber is much less suitable for characterizing the acquisitions of wired telecom operators. In order to realistically evaluate acquisitions of wireline operators, it is necessary to take the discounted cash flow method as a basis and be based on a business model designed for 5-10 years.
Within the framework of the comparative method, the main industry multipliers are evaluated: annual profit, capacity for the production of finished products, and revenue. Then the estimate obtained using the multiplier is adjusted for certain premiums (discounts) behind:
- the urgency of the transaction;
- company's opacity (highest);
- quality of management;
- geographical position;
- marketing positions;
- legal structure.
To assess premiums (discounts), lawyers, tax consultants, that is, specialists in specific risks, are hired. As a result of the correction, the final price may differ from the original one by more than 20%.
Example 3
Suppose a decision is made to use the comparative approach to assess the value of small businesses (less than $500,000). At the same time, the appraiser has at his disposal a detailed database that includes information (on more than 350 such companies) that have changed their owners over the past three years. This approach will give good results: in 80% of cases, a business is sold for a certain price. However, if there are less than 100 analogues in the database, it does not make sense to use it. In this case, the error rate is too high.
The selection of a suitable analogue for a medium-sized and non-public company is a problem in developed markets as well. Outside the stock market, the information is fragmentary; in fact, it is possible to use information about 5-6 acquisitions. Based on the obtained price multiplier, the exact value of the company can be estimated at a stretch. So you can get only a general idea of the order of its values.
Note. The comparative approach can be used only by those companies that have extensive experience in selling existing companies (and only to determine the payback period of investments).
Thus, in order to avoid errors when using a comparative approach, it is necessary to assess the homogeneity of the industry in terms of the size of enterprises, their technical equipment and financial condition. When choosing indicators for comparison, you need to check whether there is a connection between them and the capitalization of companies in the industry or their selling prices (according to data on completed transactions).
Mistakes when using the cost approach
Cost approach(asset-based) - a general method for determining the value of an enterprise and (or) its equity, which uses one or more methods based directly on the calculation of the value of the company's assets less liabilities.
Valuation using the cost approach involves the use of various methods:
- comparative unit cost method- valuation of property based on the use of single adjusted aggregated cost indicators for the creation of analogues. Its essence is as follows: for the object to be evaluated, an analogue object is selected that is very similar to the object being evaluated in almost all characteristics, materials used and manufacturing technology. The cost of a unit of measurement of an analogue object is multiplied by the number of units of the object being evaluated;
- lumped element cost method is to evaluate the property based on the value of the cost of creating its main elements. The method uses data on the cost of various elements, that is, the components of a building or structure (element costs). The calculation of elemental costs includes, for example, the breakdown of the building into its component parts, the establishment of the average cost for these parts;
- quantitative analysis method consists in evaluating the object on the basis of a full estimate of the costs of its reproduction. For example, the cost of construction is determined by summing up all the costs of erecting or installing the components of a building (in this case, indirect and direct costs must also be taken into account). In order to apply this method, it will be necessary to compile a list of all materials and equipment, calculate the labor costs required to install each element, take into account indirect, overhead costs and profits for the developer.
In practice, when applying quantitative analysis method errors may occur due to incorrect selection of data on the cost of units of comparison in buildings that do not correspond to the type of the object of assessment. This method is quite laborious, its application is based on compiling a list of all materials and equipment, calculating the labor costs required for the installation of each element, which requires the involvement of qualified estimators;
- index method consists in determining the replacement cost of the object being valued by multiplying the book value by the corresponding revaluation index. Indexes for the revaluation of fixed assets are approved by the Government of the Russian Federation and are periodically published in the press.
The main feature of applying the cost approach for enterprises is that the book value of the company's assets and their actual value are very different. Therefore, when analyzing assets, it is necessary to evaluate them at market value. As a rule, this significantly increases the value of assets. First of all, it concerns machinery and equipment. In many small companies, a significant amount of fully functional equipment has zero residual value, and the market value of this equipment can be quite significant. When analyzing inventories, it is necessary to discard their illiquid part, and when evaluating accounts receivable, it is necessary to discard the bad part.
Valuation Reliability costly approach largely depends on the completeness and reliability of economic information from the sub-sector to which the property being valued belongs ( economic structure prices for products of the sub-sector, established indicators of profitability of sales, some cost standards, etc.).
Errors when calculating discounts
By purchasing less than 100% of the shares, the owner receives a certain amount of rights (property rights and rights to manage the company), which is limited compared to the rights of the sole owner of the business. This means that the buyer does not have full control over the business, so he has the right to demand a reduction in the price of such a package compared to the value of 100% of the company's equity. In this regard, when calculating the value of shareholdings, a discount for an insufficient degree of control is applied.
The reason for applying the discount for insufficient liquidity is the high risk of not receiving dividends and other income from holding securities (shares) caused by internal problems company or the state of the industry.
It is difficult to accurately determine the size of such discounts, since it is not always possible to obtain full information about the level of corporate governance of companies and policies regarding minority shareholders.
When selling non-controlling stakes in open market(the market of a ready-made business, which uses non-stock mechanisms for the alienation of companies), the discount can be very large - up to 90%. For this reason, it is recommended that either the entire business or a controlling stake be put up for sale. Otherwise, the probability of a successful search for a buyer is very small.
It is important. When preparing transactions related to the purchase and sale of blocks of shares (stakes in the authorized capital) of a company, it is necessary to analyze in detail the restrictions on the rights of the owner of such a block, determined by law and the charter of the company.
Significant attention should be paid to the analysis of the possibility of selling a block of shares. It is necessary to check the presence of transactions with the company's shares in existing trading systems, assess the potential attractiveness of shares or shares in the over-the-counter market, as well as the transparency of the corporate governance system and the risk of non-receipt of income. Based on the results of the analysis, it is advisable to determine acceptable discounts for insufficient liquidity and the degree of control in this case. Moreover, in the practice of valuation activities, such discounts are applied sequentially: first, a discount for control, then - for insufficient liquidity.
There are certain levels of control: if 75% (or more) of voting shares are purchased, then the buyer acquires virtually complete control over the situation in the company and discounts are hardly appropriate. The second level (25%) is a blocking stake, which makes it possible to reject decisions that do not suit. In our opinion, if we are talking about buying a stake in excess of 25%, the discount will be very small or not at all.
Currently, there is no common method for calculating the discount. Preferred shares, as well as small blocks of shares that do not give the opportunity to vote and are less liquid, should be traded at a discount of 20-25% (excluding dividends in the value of the package). But since the dividend yield on common and preferred shares is different, this discount needs to be adjusted. The amount of the adjustment is determined as the difference between the dividend yields of preferred shares and ordinary shares times four (assuming the expected difference continues in the coming years). This premium will partially offset the discount associated with insufficient liquidity and control.
You should also pay attention to what packages other shareholders have. If there are no owners of more than 25% of the shares among them and the probability of their occurrence is low, there is no reason for concern.
Another issue that needs to be addressed is company reputation. In Russia, one can already quite clearly understand which companies recognize the rights of minority shareholders and which do not.
Let's consider the mistakes that often occur when estimating the value of small companies.
Mistakes in valuing small companies
This type of error can be divided into three groups.
The first group of errors related to the nature of enterprises. For example, small companies are owned by a fairly narrow circle of people who are often united by either family or friendship. This circumstance can be decisive in building a business management system and its reporting. Such enterprises suffer from the lack of many documents that allow them to evaluate their real profits, do not have strategic development plans, and such companies do not even need to disclose objective information about their activities.
The actual results of the enterprise are reflected in its management reporting. Business brokers are oriented to its data in their valuation activities. From positions Russian legislation an assessment carried out in this way cannot be considered fully legitimate:
- First of all, the consulting company acts as an interested person: it determines the price for which it is really possible to sell the business;
- Secondly, most entrepreneurs are not interested in voicing information about their real income.
Therefore, the results of the assessment and the indicators on which it is based are referred to in the conclusions of business brokers only as an expert opinion.
Since the value of a business is based on how much profit it can generate under the direction of a potential buyer, accurate forecasting becomes hypothetical. Small companies as profit producers are exceptionally unstable. Therefore, there are no guarantees that the business will develop and function successfully when the owner changes. In practice, there are many examples of the fact that sales and revenues of the company increased several times after the change of owner-manager. And sometimes you have to admit that in the past successful companies fail.
Note. Business brokers value an enterprise at present use, taking into account the revenue it generates here and now (this figure is discounted). At the same time, the company's prospects are taken into account, but only as one of the factors affecting its value.
The second group of errors arising in the evaluation of an existing business is due to an attempt to apply some popular formulas to this process. Here the most common are: error types:
- mismatch error- dangerous due to the fact that many experts consider this method the most convenient for assessing existing enterprises. The problem is that, unlike most other goods, a business as an object of purchase and sale cannot be subjected to exact comparison - incomes depend on the unique characteristics of the company, few companies have a sufficient number of common economic features;
- odds error- entered into domestic practice from Western textbooks, the methods described in which are rarely applicable in Russian conditions. For example, some English consultants propose to determine the cost of a supermarket according to the scheme "the cost of existing inventory + monthly sales volume." The cost of a cafeteria and a small restaurant in the US is usually equal to 3-4 months of sales. However, in Russia, business profits are not directly dependent on turnover (this indicator is individual for each enterprise).
Currently, the development of the main coefficients that can be used in business valuation is underway. This is one of the factors that can confirm the correctness of the valuation of the company, carried out by the income method;
- addition error- occurs when the value of a company is determined as the sum of the values of its assets. The difficulty here arises when assessing goodwill - an intangible asset that can be the most valuable of all the components of the enterprise's property. The inapplicability of this approach can be illustrated by the example of enterprises that represent "cash flow". Let's say one of the largest Russian sellers of equipment for office printing is put up for sale. The value of its assets is quite low, but the availability of exclusive distribution rights for the products of leading Western manufacturers and a permanent client base makes the company's value ($450,000) quite consistent with the requirements of investors. If the company put up for sale owns real estate, the latter is valued separately. This indicator is added to the value of the business received income method. This is explained by the fact that real estate currently acts as a highly liquid asset. A similar scheme is used if the company being sold owns expensive high-tech equipment. In addition, a similar model is used in the sale of trading companies with significant volumes of commodity balances. This raises the question of determining their liquidity. Therefore, one has to resort to the use of certain coefficients.
To third group of errors only one applies fallacy of subjectivity(occurs most often). A small business is often a kind of extension of its owner, experiencing a certain emotional attachment to him, which makes it difficult to objectively assess the company and leads to overpricing. Often the seller includes non-economic factors in the cost of the business: his own, not confirmed by any figures, idea of the company's place in the market, his expectations for the future, etc. Therefore, the seller this business do not try to determine its final cost yourself. Timely appeal to specialists will allow you to carry out the sale more efficiently and avoid disappointments in the process of finding an investor.
Summary
In conditions of financial instability in the market, it is becoming increasingly difficult to assess the value of a business. Existing methods are far from perfect, so financiers have a lot of problems associated with the evaluation process. Using the accumulated experience and own practice in company valuation, you can significantly reduce the risk of errors in the future.
technical and operational qualities of an object under the influence of natural factors and human activity is called:
a) wear and tear;
b) functional wear;
c) external (economic) wear and tear.
79. Bringing the future value of a monetary unit to the current moment in time is:
a) discounting;
b) annuity;
c) comparison.
80. Does the size of the enterprise affect the level of risk:
81. Risk due to factors external environment called:
a) systematic;
b) non-systematic;
c) another answer.
82. For a debt-free cash flow, the discount rate is calculated:
83. When the growth rate of the enterprise is moderate and predictable, then the following is used:
a) discounted cash flow method;
b) income capitalization method;
c) net assets method.
84. What components does it include investment analysis for calculations under the cash flow model for equity:
a) investment;
b) increase in own working capital;
c) demand for products.
85. Which of the following is not a cost standard:
a) market value;
b) fundamental value;
c) salvage value.
86. Which method will give more reliable data on the value of an enterprise if it has recently emerged and has significant money:
a) salvage value method;
b) the net asset value method;
c) income capitalization method.
87. For a debt-free cash flow, the discount rate is calculated:
a) as the weighted average cost of capital;
b) the method of cumulative construction;
c) using the capital asset valuation model;
Which of the statements does not correspond to the legally established concept of the market value of the appraised object?
a) the payment for the valuation object is expressed in cash or in kind;
b. the parties to the transaction are well aware of the subject of the transaction and act in their own interests;
in. one of the parties to the transaction is not obliged to alienate the object of evaluation, and the other party is not obliged to accept the performance.
89. If the calculation of the value of the business is carried out for the purpose of concluding a sale and purchase transaction, then the following is calculated:
a. investment value;
b. the cost of replacing the object of assessment;
in. market value;
d. salvage value.
90. Consumers of the evaluation results may be:
a. only customer evaluation;
b. any participant in the valuation activity;
in. executive agencies;
d. the owner of the property being valued.
What document is the basis for business valuation?
a. license;
b. contract;
d. certificate;
e. order.
At what stage should the appraiser consider the inflation rate and the company's market share?
a. determination of the discount rate;
b. retrospective analysis and forecast of gross proceeds from sales;
in. calculation of the value in the post-forecast period;
d. choice of cash flow model.
At what stage should the appraiser determine depreciation allowances based on the current holdings of assets and future additions and disposals?
a. analysis and forecast of expenses;
b. analysis and forecast of accounts payable;
in. determination of the duration of the forecast period;
d. making final amendments.
94. The formula below calculates:
WACC= kd ( 1 − t)Wd+ ksws+ kp wp
a. the share of borrowed capital in the capital structure of the enterprise;
b. the cost of raising equity capital (preferred shares);
in. weighted average cost of capital;
d. the share of ordinary shares in the capital structure of the enterprise;
e. the cost of raising equity capital (ordinary shares).