Buying a ready-made business in St. Petersburg is a complex and time-consuming process. One of the key steps is the evaluation of a finished business. Correctly determining the value of a business is important for both the buyer and the seller.

Problems of pricing in the ready-made business market

The seller of a ready-made business most often overstates the cost, because the object is perceived by him as a child in which he has invested his strength and money. Businessmen who sell ready-made businesses in St. Petersburg sometimes even get offended when the buyer tries to lower the price. Therefore, an entrepreneur who decides to buy a ready-made business in St. Petersburg must also make an assessment so as not to overpay for the object.

Evaluation of a ready-made business is a tool for forming an adequate price

Professional brokers of the Altera Invest company explain that by playing the price on the market of a ready-made business, you can change a lot. There is always a chance to buy or sell a business at an overpriced or underpriced price.

The task of a professional broker is to ensure that both the seller and the buyer win in the end. In the black, both can remain in the event that a correct assessment of the business has been made.

Assessment Methods

According to experts, there are several approaches to evaluating a ready-made business:

Cost approach. In order to give a correct estimate, you need to calculate what costs you would incur if you decided to create a business from scratch: how much money would you spend on repairing the premises, buying equipment and supplies, recruiting staff. This also includes months of "downtime", for which you will also need to pay rent.

For example, according to the drawn up business plan, the total amount reaches 3 million rubles, while the owner offers you to buy a beauty salon for 5 million rubles. Here you can safely point out to the seller of the business that it is more profitable for you to organize your own business than to acquire his business.

This is a good method, however, Altera Invest's professional business brokers point out that this kind of assessment does not take into account the intangible value of the company. That is, reputation, brand, various know-how, established customer base, etc.

Comparative approach. Do not forget that no two businesses are the same. This is due to the fact that even if one ready-made business is located on the main street, and the other is 50 meters from it, but around the corner, of course, the level of income will be different. Accordingly, the cost of the finished business will be different.

That is why, among business buyers, the income method of evaluating a finished business is most often used. After all, having bought a business, they want to recoup it in the shortest possible time. This kind of approach is best applied to a business that generates good profits.

Mixed way. This is a combination of the two above. So you can get the most objective picture. A competent and reliable assessment of a ready-made business can only be given by professionals who have been working on the market for many years.

How to evaluate a ready-made business?

A few seditious thoughts

I am sure that professional appraisers will not like this article. Many of them may even want to crucify me upside down on the cross for seditious thoughts about the appraisal business. The fact is that the role of this sphere, its place in the modern economy, especially in small and medium-sized businesses, are often exaggerated, redundant, and practical conclusions are controversial.

What is, by and large, a market valuation of a business? This is a determination of the cost for which it can be sold, and what profit it will bring in the future. Professional appraisers have several basic valuation methods at their disposal, the content of which is widely covered in the valuation literature and enshrined in valuation legislation.

Three methods are used in Russia: "income approach", "cost approach" and "comparative approach". All these methods are complex, require special training, and for an ordinary entrepreneur, whose motto is "act and earn!", They will seem unnecessarily complicated and have a very distant relation to his activities in the form of a pair of outlets, a car service or an online store.

Maybe appraisers are right with their calculations when it comes to large enterprises and transnational corporations?

Alas, not always. Otherwise, the stock market, trading in stocks and other securities would simply die, or would never experience the colossal fluctuations that we periodically observe. Indeed, in the stock markets, especially in countries with developed and rapidly developing economies, colossal money is spinning. Investment funds, management companies, before purchasing shares or bonds of certain companies, actually conduct a thorough assessment of the value of enterprises, rightly expecting a certain level of dividends or capital gains.
If business valuation methods were correct, then the movement of funds in the stock markets would be insignificant, since everyone represented quite accurately how much one could get by investing in a particular company. In fact, the stock market is very volatile and subject to significant fluctuations, sometimes contrary to the obvious logic and methods of calculating business valuation.

Take, for example, the latest stock market crisis. China suffered the greatest losses - since the beginning of this year, the total index of shares of Chinese enterprises has decreased by 20 percent. At the same time, China's GDP growth in 2007 amounted to 11.4 percent, the forecast for 2008 is approximately the same. So where did a fifth of the Chinese potential evaporate in a short time? It turns out that professional appraisers corrected their forecasts so quickly, having made a mistake by trillions of dollars?

What do I care, - an ordinary entrepreneur will say, - to China's GDP, investment funds of valuation methods and other high matters? And he will be right. No one but him can better assess the potential and value of his business. After all, in most cases, only an entrepreneur thoroughly knows all the strengths and weaknesses of his business, as well as the limit of its development. In order to evaluate the business yourself, it is enough to know a few basic points and follow common sense.

Shortcomings of Individuals

The sale of a ready-made business serves as a kind of moment of truth for an entrepreneur. The point is not even so much in how you developed it, but in the fact that by the time of the sale, due to ignorance of some legal aspects, its value may turn out to be much less than you imagined it. This is especially influenced by the choice of the organizational and legal form of doing business.

Many Russians, when starting their own business, register as individual entrepreneurs. Yes, this form has a lot of advantages: ease of registration, lower penalties, no need to make a seal and open a current account, etc.

But there are also disadvantages, one of which is directly related to the topic of the article - this form of entrepreneurship does not allow you to sell your business in one fell swoop as a complex of ready-made businesses. It is no coincidence that all methods of business valuation, enshrined in law, are tailored for legal entities. After all, you are acting as an individual, and all contracts, property, permits, licenses, franchises, trademark rights, etc. are executed on you.

The buyer will have to re-register all this for himself, spending a lot of time and money. Naturally, all costs, including payment for speed, affect the final amount of the transaction. And it is not yet a fact that, by renewing the contract with the new entrepreneur, the landlord will provide the new owner with the same conditions as you. He may simply not like the personality of the buyer.

So, if you intend to sell your business, in advance, minimize the number of documents that require re-registration.
It is advisable to transfer your status as an entrepreneur to the owner of an LLC or a joint-stock company when your business has reached a more or less significant scale. Then you can safely prepare for its sale in whole or in large part.

On the contrary, when purchasing a business, remember about the possible additional costs associated with the peculiarities of its organizational and legal form - individual entrepreneurs are not sold, only their property is subject to sale, and the rights under the concluded agreements are assigned.

One business, three costs!

When you are about to sell your business, you have little interest in the motives of potential buyers at first. However, it is motivation that can have a significant impact on the final price of the transaction, that is, on its market value. A buyer can have three main goals, but they are all related to generating income:

1. Sale of your business in parts or further resale. It is quite possible that you own real estate objects or the right to lease a land plot located in a promising area where active development of residential buildings or shopping complexes is planned. Or is it a resale of a regional brand that you have developed, such as Petrov's Krupa, to some large Russian or foreign agro-industrial holding, which is ousting competitors locally.

Approximately according to this scheme, the once famous Armavir Tobacco Factory, which has now become a haven for numerous offices, was bought out and then resold to one of the international tobacco concerns. In this case, the concept of liquidation value is applicable - the price of assets minus the total amount of liabilities and costs of sale.

2. Income from the activities of the enterprise. The buyer is interested in maintaining and developing the business. Perhaps some repurposing, reorganization or affiliation.

In this situation, we are talking about investment value, which takes into account the increase in profits from market expansion, the use of know-how, reorganization plans of the proposed owner. There's a lot of bargaining to be had here, just as Yahoo's shareholders did when they finally turned down Microsoft's super lucrative $44.6 billion offer. The guys from Yahoo apparently felt that in the future their company would cost much more.

3. The combination of the maximum values ​​of the two values, liquidation and investment, results in a reasonable market value. It is possible, as a rule, to sell your business at this most favorable price to professional investors who specialize in acquiring, developing and further selling a business. These can be local businessmen involved in everything that brings money, and representatives of large companies.

Therefore, if you consider your business profitable and promising, feel free to contact large investment companies and diversified holdings of oligarchs with an offer. Surely they do not know about your existence and, if they are interested, they can give a fair price that is beyond the reach of competitors of your level. You can also advertise on specialized bulletin boards or business portals. Today in Russia there is a lot of money, the owners of which are looking for investment objects.

What is the investor thinking?

Any investor, whether it is an investment fund or your neighbor, thinks about how quickly the invested funds will pay off and begin to generate income. By the way, this is one of the most effective, but at the same time a simple and logical way to assess the value of a business. Professional appraisers would see elements of the "profitable" method in it.

In the late 1990s and early 2000s, an attractive payback period was 1.5-2 years in small and medium-sized, and sometimes even in large businesses in Russia. As the value of the business increased, the payback period increased to 2-3 years. And in large - and up to 5. In the West, the standard is a period of 7-8 years, which is quite reasonable, given the lower cost of credit resources.

The payback period is directly affected by several factors. Firstly, the total cost of the business, its scale - the more expensive the longer you have to wait. But then every month there will be a much greater return.

Secondly, the value of the credit rate - the higher it is, the faster the business should generate income. Otherwise, bank deposits will become a more attractive alternative than buying a ready-made business.

The third factor is the rise in prices for real estate, land and, accordingly, the cost of rent. Land and real estate are becoming more expensive, their share in costs is increasing, which leads to an increase in expenses not related to business development, and therefore reduces overall profitability and lengthens the payback period.

The fourth defining moment is the turnover cycle. The shorter it is, the less working capital and funds are required to start and, therefore, the time to recoup the money. It is one thing to sell newspapers and magazines, and another to do construction and repair work. Although the profitability is almost the same.

In practice, the calculation is simple. Let's say your two outlets (standard kiosks) give 120 thousand rubles. net income per month. The kiosks are owned by you, but built on rented municipal land. They are not considered full-fledged real estate objects, they appear as temporary structures, and they will not let you buy the land under them, but they can be withdrawn at any time for city needs. Therefore, as an asset, they do not represent independent value. In this case, a reasonable selling price of your business, given the profitability and short turnover period, may be equal to the amount of profit that you receive in a period of one to two years - from 1.44 million to 2.88 million rubles.

Many large companies also adhere to the temporary principle. For example, the Tander company, which owns the Magnit retail chain, followed the following tactics - when opening a store in a new location, the company waited 4 months. If the store began to pay for itself, they left it. If not, closed.

For the price of an entrance ticket, or draw up a business plan

Estimating the value of a business depending on the payback period is, of course, convenient and simple, but it misses several important things that could increase its price. First, how much do similar offers cost on the market, and how much time and money would it take for a buyer to create and develop such a business on their own? It is possible that for you personally, thanks to connections in the mayor's office or equipment or premises bought on the occasion, the business cost much less and you developed faster. Selling based only on the payback period would be illogical. Therefore, it is useful to at least roughly estimate the cost of the "entry ticket" from scratch.

Calculate how much you would have spent by the time of the sale at current prices of money on rent, purchase of equipment, advertising, what would be the total amount of costs until the moment of the first profits. Simply put, draw up an approximate business plan, but taking into account your knowledge of all the nuances. Such an approach is called "costly" by independent appraisers.

A business plan, even the simplest one, will help you convince a potential buyer that your business is worth buying. Try to include all your strongest competitive advantages in this business plan for the client. For example, your hairdressing salon employs the best craftsmen in the area, for the sake of which people come to you who are ready to overpay for quality. Or that you have the best imported equipment in the area for the production of bakery products or dumplings.

A good name is worth a lot

Surely you are not the only one who is going to sell a business like yours. Naturally, a potential buyer will compare all available offers, and most likely it will require the use of elements of the so-called "comparative" approach. The accuracy of the estimate depends on the quality of the collected data, since, using this approach, it is necessary to collect reliable information on recent sales of comparable properties.
This data includes: economic characteristics, time of sale, location, terms of sale and terms of financing. For example, it is one thing to sell a business for cash, another thing is to sell it on credit.

The effectiveness of the comparative approach is reduced if there were few transactions or a lot of time passed between them; if the market is in an abnormal state, as rapid changes in the market lead to distortion of the indicators. For example, a new head, a well-known lover of the redistribution of property, was appointed (elected) in a district or city. Or, as in Sochi, they decided to hold the Olympic Games.

In order not to suffer much with a comparative assessment of a business, you can resort to analyzing franchise offers similar to your profile, which indicate the requirements for a franchise buyer. The main one is the amount of investment for the business to operate and develop. Simply put, the franchisee is asking you to work with their technology, brand, style, and so on. A franchise can be sold to almost any type of small and medium-sized business: sushi delivery, travel agencies, restaurants, stamp shops and real estate agencies, etc. Type "franchise" or "franchise directory" into an Internet search engine and you will find hundreds of offers indicating the amount needed to start a business.

At the same time, the comparative approach allows you to focus on your individual characteristics, on the intangible assets created during your work. Western economists, and now Russian ones, use such a concept as "goodwill" (goodwill - good will).
Goodwill is essentially a combination of those elements of a business or personal qualities that encourage customers to continue to use the services of this enterprise or this entrepreneur, and which generate a profit in excess of that which comes from tangible as well as intangible assets that are subject to an accurate monetary value.

It is said to occur when you make a profit higher than the average in this area of ​​\u200b\u200bbusiness, that is, people are predisposed to buy from you.

Goodwill includes a favorable location, an established clientele, and the credibility of individual employees. This factor cannot be felt and calculated, but it is necessary to evaluate. Indeed, the development of any business is based on good relations, that is, the good will of sellers and buyers. And your task is to convince the buyer of your business that you have earned goodwill, and it is not in vain that he pays an additional 10-20 percent for a promising and promoted business.

When You Can't Do Without an Appraiser

Having fired a couple of arrows in the direction of the institution of professional appraisers, for the sake of truth it is worth noting that in practice there are moments when you simply cannot do without professional appraisers.

Firstly, in a dispute with the tax office over the market value of the object of sale and purchase in the form of real estate. For example, you bought a room for a workshop for 3 million rubles, and the tax authorities, in accordance with Article 40 of the Tax Code, having the right to control prices to determine the taxable base, they say - you, brother, underestimated the cost of the room and did not pay extra taxes.

This is where the conclusion of a professional appraiser helps in a dispute with the inspection, which will become an argument for setting the transaction price corresponding to the current market value. The opinion of a professional has the status of an official document and can be used in an arbitration court as convincing evidence in cases involving the determination of the completeness and correctness of the calculation and payment of taxes. In addition, sometimes it is beneficial to officially revalue the property of the enterprise downward, which helps to save on property tax.

The second category of partners of an entrepreneur, in relations with which the opinion of appraisers can be useful, are banks. By issuing secured loans, banks try to underestimate the value of the pledged property. Determining the real market value of the property by an independent appraiser makes it possible to establish a fair ratio between the value of the pledged property and the amount of the loan. In case of non-repayment of the loan, the official conclusion contributes to the prevention of disagreements between the parties to the transaction that arise when foreclosing the pledged property.
Professional appraisers are a great help even if you use the services of insurance companies. There are several hidden points that insurers prefer to remain silent about.

A case from one's life. The entrepreneur insured the warehouses he purchased for a fairly decent amount. But when the fire broke out, the insurance company offered a much smaller amount to be paid than was indicated in the contract, stating that, on the basis of current legislation, the contract is void in terms of the excess of the sum insured over the actual (market) value of the property. It was of course impossible to determine in hindsight how much the burned warehouse cost. At the same time, the overpaid insurance premium was not returned to the entrepreneur.

If, at the time of concluding the insurance contract, the entrepreneur was armed with the conclusion of the appraiser, there would be no problems - the examination carried out by an independent appraiser categorically does not allow the insurer to subsequently dispute the sum insured under the contract.

There are other times when professional valuation helps entrepreneurs. Among them, it should be noted the assessment of damage in the event of an insured event, as well as damage to the property of the entrepreneur or third parties. Knowing how much you really lost, you will be able to clearly justify your position in a controversial situation, including in a lawsuit.

D. Protasov, business consultant
Magazine "Modern Entrepreneur. Individual approach to business", N 3, March 2008

Recently, transactions for the purchase and sale of small businesses (enterprises with an annual turnover of up to $ 1 million and the number of employees up to 150 people, hereinafter abbreviated as MB) show rapid growth: more than 50% of MB enterprises change their owners during the first 3 years of their existence , with 30% of them doing so annually. In this regard, the issue of an objective assessment of the cost of MB is of particular relevance. The relative complexity of this issue is due to the fact that in any assessment, to a certain extent, there is subjectivity, which is expressed in the desire to sell more expensive or buy cheaper the business or its share being valued. In this article, we will consider methods for determining the value of an MB, which allow both to justify its high cost when selling, and to assess the investment potential of an MB when buying it.

Methods for estimating MB
The variety of assessment methods used is too great to give a complete and detailed analysis of all existing methods. In order to be able to evaluate the MB, it is enough to know 4 methods that can be used both separately and in combination with each other:

1) Replacement cost method
This method is based on the calculation of the cost of creating an enterprise comparable in terms of financial performance, market position, existing customer base, established relationships with suppliers, staff with the enterprise to be assessed. In other words, the appraiser calculates what it would cost to create such a business if the buyer were to create such a business from scratch. Then, as a rule, a discount (discount) from the received replacement cost is taken to justify the attractiveness of the price requested by the seller (20-30%). The use of the replacement method leads to a high appraised value of the business, since it allows to include in the appraised value almost all the expenses incurred by the current owner of the business during the entire existence of the enterprise.

2) Book value method
This method is the easiest to use, as it allows you to evaluate the company according to the balance sheet: for this, it is enough to calculate the value of the assets that the company has, taking into account their depreciation, and subtract the cost of its liabilities from the amount received. This method is often called liquidation: in fact, it shows how much money can be extracted from the game of blackjack for real money, if you stop its activity, sell assets, and pay off debts from the received money. The book value method is considered the most conservative valuation method, since it does not take into account many aspects of value that the buyer receives free of charge if this method is applied (for example, the same intangible assets). However, this method can also make sense for the seller if the company has a high book value of assets, but cannot boast of a significant cash flow.

3) Method of discounting cash flow (Discounted cash flow (DCF)method)
This method is based on an assessment of the financial results of the enterprise, in the first place - its cash flow. Most often, cash flow is understood as the net profit of the enterprise (after paying interest and taxes) erected (increased) by the amount of depreciation. Discounting is a financial transaction that allows you to determine the present value of future money. It is based on the idea that money today has more value than money received tomorrow. For example, $1,000 that you will receive in a year is not worth $1,000 today, but $1,000/(1+7%) = $934, because if you put $943 in the bank today at 7% per annum, then in a year you will get 1000$. Therefore, the fair value of the future cash flow should not exceed the amount that I can invest today with less risk and get the same result. 7% in this example is the discount rate, usually equal to the return on risk-free investments (in our example, the return on bonds of the Ministry of Finance of the Republic of Belarus). To use enterprise cash flow discounting, you must define the period to be discounted. It depends on how much payback you put into the project. That is, if you want to demonstrate to an investor that his investment will pay off in 3 years, you need to discount the cash flow for this period. The value of this method lies in linking the value of the business with variables such as payback and return on risk-free investments.

At the same time, one should not regard the value of a business obtained by this method as its actual price. If you say that your business is worth as much as an investor will receive in 3 years on a risk-free investment, then any reasonable investor will consider this business overpriced because with a comparable return, he will always choose less risk. Therefore, discounting should be considered as a way to determine the "ceiling" of the cost and understand that the actual value of your business should not exceed it. Moreover, you need to show that the internal rate of return of the business is greater than the return on the risk-free investment (i.e., the presence of a return premium) for it to make investment sense. Either way, the discounted cash flow method is appropriate for valuing a cash-generating business, and its value is determined by the fact that it allows the fair value of the business to be judged in the most sensible way to invest. I recommend that business buyers, in conjunction with the use of this method, analyze the income and expenses of the enterprise in order to assess the reliability and stability of the enterprise's cash flow, as well as assess its financial stability (margin of safety).

Intangible assets
Often, the valuation of the intangible assets of the business is used to justify the higher value of the business, especially when using the book value method. Some intangible assets (hereinafter - intangible assets) can be reflected in the balance sheet - most often this happens if the occurrence of intangible assets was associated with expenses that had to be posted to accounting accounts. However, it would be erroneous to assume that the balance sheet fully reflects the list of intangible assets that the enterprise has and their actual value. Most often, the balance sheet indicates only a small part of the obvious intangible assets and their nominal value, which may differ from the actual one. The other extreme is to classify certain functions and elements of the business as intangible assets: employees, customer base, suppliers, business processes, and in general everything that can have at least some value in the eyes of a potential buyer. It is also difficult to call this approach objective, since it aims to sell the same enterprise twice: the first time as a material object, the second time by dividing it into intangible assets. If the seller talks about intangible assets in this way, he is most likely trying to justify the asking price, which he failed to link to more real assets. An objective approach to accounting for intangible assets is to identify intangible assets that are not reflected in the assessment of the material base of the enterprise and which have an independent value in the context of a sale and purchase transaction. These intangible assets are:

1) Special permits (licenses) and certificates
The value of these intangible assets lies in the fact that they significantly expand or vice versa are a necessary requirement for the scope of the enterprise. Their cost is determined by the principle of substitution: about how much such permits would cost you if you wanted to get them yourself, you will be prompted by any law firm.

2) Trademarks, patents, copyrights, other intellectual property
The peculiarity of these intangible assets is that they are an independent asset that can be used to reduce the tax base of an enterprise and reduce the cost of withdrawing dividends, not to mention receiving license fees from other enterprises.

3) Insurance policies
The value of intangible assets data lies in the insurance coverage provided by insurance policies paid for by the money of the previous owners. Of course, insurance coverage is paid upon the occurrence of insured events, which do not always happen, but still having insurance is certainly a positive thing.

4) Debt of the enterprise to the owners
Despite the fact that the debt of the enterprise to the owners, from the point of view of the balance sheet, is the obligation of the enterprise (its liability), it carries a value that forms a certain intangible asset. We are talking about re-issuing debt to new owners in order to use it to withdraw future dividends, which reduces the cost of withdrawing future dividends by 12% of the amount of debt.

5) Exclusive working conditions with suppliers and contractors
This intangible asset includes the discount percentage and payment terms that the company has in contrast to the standard working conditions available to any market participant. For example, an auto parts store may have a supplier discount of 35% off the retail price and a 15-day payment deferral, as opposed to a standard 25% discount and a 5 business day payment deferral. The cost of this intangible asset is determined depending on the volume of trade under these working conditions: with a turnover of $5K per month, such agreements can bring additional profit of $500 and another $50 if the proceeds are deposited before the expiration of the grace period. As a result, in 12 months such agreements can bring additional profit of $6.6K, which, you see, is not a little.

6) Know-how
Sometimes the proposed acquisition company may have knowledge that allows it to be more effective in comparison with other similar companies. These can be standards, regulations, business processes, management and accounting principles, marketing tools. Of course, such knowledge is rarely formalized even in a simple written form, therefore, in order to distinguish it in the chaos of the enterprise's operations, it is necessary to have a fairly trained eye. However, isolated and put into proper form, this knowledge has great commercial potential - both for the enterprise itself and for any other in which it can affect efficiency.

7) The right to lease an office / retail facility
It is often the case that a business has a valuable office or retail location in terms of customer traffic or cost per square meter, resulting in an intangible asset such as a leasehold that can be transferred to another business for a fee.

8) Website, groups in social networks
Intangible asset data is usually evaluated either in terms of the principle of substitution (how much it will cost to develop an analogue), or in terms of the number of hits generated per month. If we know such a statistical indicator as the average check, we can calculate the amount of revenue that these resources “make”. However, it is worth remembering that both the site and groups in social networks are not only assets, but also liabilities that have their own expenditure side. In order to objectively assess the costs of maintaining and promoting resources, I recommend calculating the costs per 1 appeal, which will allow you to compare the result with the average check and draw a conclusion about the potential of this intangible asset.

9) Client base
The client base is usually positioned as the No. 1 intangible asset, however, this prioritization most often occurs when intangible assets are used to inflate the value of the business. Objectively, the client base forms an intangible asset when it is designed in such a way that allows you to apply certain marketing tools to it (for example, SMS mailing) in order to receive a certain number of customer requests as a result. From this point of view, the client base as an intangible asset is comparable to a website and groups in social networks.

Hidden obligations
If accounting for intangible assets in business valuation has become a common practice, then hidden liabilities rarely appear in business valuation. We are talking about certain tax, financial and legal aspects of the business that can lead to adverse consequences for the owner, which is reflected in the additional costs that arise after the implementation of the sale and purchase transaction and fall heavily on the shoulders of new business owners. The use of the term "hidden obligations" in relation to these aspects is explained by the fact that they exist at the time of the transaction, but are rarely detected by a standard audit of financial statements, as they require interdisciplinary knowledge. Here are some examples of hidden obligations:

1) Legal claims and lawsuits
The seller may or may not be fully aware of the legal claims and claims that exist at the time of studying the business, while they often carry not only accounts payable, but also penalties and legal costs of the plaintiff, not to mention that the legal costs will have to be borne by the enterprise itself - for the representation of interests and defense in court.

2) Potential fines
Sometimes an interdisciplinary audit of a business reveals the commission of various actions related to closer interaction with government bodies than normal business activities imply (importing cars under Decree No. 6, obtaining rights to operate unused real estate, issuing and selling securities, foreign gratuitous assistance), which can be fraught with various violations and, as a result, a fine.

3) "Poison Pills"
"Poison pills" in legal practice are the clauses of contracts aimed at protecting the second party, which is expressed in the obligation of the enterprise to pay compensation in the event of unilateral termination of the contract or other actions undesirable for the party. The identification of these hidden obligations and their neutralization require a legal audit of the enterprise's contracts. A special case of the “poison pill” may be the copyright of the former owners of the enterprise for some inseparable part of it, which may eventually lead to a situation where the enterprise will be forced to pay a fee for the use of intellectual property or refuse to use it.

How to evaluate the value of a business?
Now that we have a broader understanding of business valuation methods, we can move on to formulating a strategy for determining its value. We will not use the cost replacement method, which leads to a clearly inflated cost. As a base, it is best to use the book value method, supplementing it with the value of the company's intangible assets. In parallel, we will determine the value of the business using the discounted cash flow method. As a result, we should have two scenarios: 1) the discounted value exceeds the book value + the cost of intangible assets; 2) book value + value of intangible assets exceeds the discounted value.

Purchase evaluation features
The peculiarity of the valuation when buying a business is that a) you know the value of the business (sales price) and you need to determine how justified it is; b) you need to verify the accuracy of the information provided by the seller on the financial results of the enterprise and the value of certain tangible and intangible assets. As in the case of a sale, when buying a business, you need to calculate the estimated value using the discount method and correlate the resulting value with the book value plus the value of intangible assets in order to understand which scenario we are dealing with. In the first scenario, it is important to determine how reliable the information provided by the seller is, whether the net profit value is correctly calculated, how stable the cash flow is.

If the assessed business corresponds to the second scenario, it is necessary to carefully study the list of assets in the balance sheet for their objective (real) value, the list of liabilities - for completeness of reflection (whether they are fully reflected in the statements) and their maturity dates. Even the compliance of the asking price with the revealed value is not a basis for considering the quoted price as fair, since the liquidation value of the assets may actually be lower than the value that they have according to accounting data. In order to mitigate the risk, the asking price must contain a certain discount from the book value. In some cases, when the listed price exceeds the book price, the seller may say that the business has some goodwill (or that the business is worth more than its tangibles by virtue of being a business).

What is goodwill?
Goodwill is a financial term that means the difference between the market value of a business and its book value, in essence, it reflects the amount that the buyer is willing to overpay for the ownership of the enterprise in excess of its book value. In other words, goodwill is the additional intangible value of a business that supplements its book value. In this context, goodwill is associated with intangible assets, which, in essence, constitute the content of goodwill. But since goodwill, on the one hand, is nothing more than manipulation from an accounting point of view (let's not forget that it is used to justify the excess of the book value of the enterprise when buying it), it must in any case be related to intangible assets. If goodwill > 50% of the value of intangible assets, I consider the value of this business as overpriced,< 50% — объективную, если гудвилл отсутствует вообще (при наличии НМА не менее 10-20% от базовой стоимости) — привлекательную для приобретения.

Conclusion
Thus, the business valuation technology depends on the purpose of the conduct and must take into account the reliability of the data provided, the book value of the enterprise, the generated cash flow, intangible assets and hidden liabilities. An interdisciplinary analysis at the intersection of accounting, financial accounting, tax legislation and jurisprudence can provide the necessary completeness of the analysis.

For many Belarusian owners, the issue of business valuation causes difficulties. Viktor Denisevich, a financial analyst at Zubr Capital, talks about the most practical valuation method and gives a formula for calculating the value of a company.

Valuing a company is like playing chess. A chess player who plays white and one who plays black can evaluate the position on the board differently. Likewise, the owner and investor are likely to have different views of the same company.

Obviously, this is because the owner and the investor have different goals. From the owner - to sell the company or part of it for the highest possible cost, from the investor - to buy a share or the entire company for the lowest possible amount.

When it comes to assessing the value of a company, there are an almost infinite number of ways to form it. But the most practical and adequate in this matter is comparative method.

Its essence is that you form an estimate, not only based on the internal resources of the company, but, first of all, based on information about the value of peer companies.

Let's say we have a conditional company "A", which is engaged in the production of shoes in Poland. Let's look at her example, how the valuation of the company is formed.

If you want to know the value of your company, then, first of all, you should start with a benchmark. That is, choose companies-analogues and analyze their value. Of course, the availability of this information depends, first of all, on the development of the stock market and the openness of the M&A market in the region.

The first difficulty that you will encounter is the almost complete lack of information about peer companies, on the basis of which you can build an assessment in our country. How to solve this problem?

There are two verified sources of information:

• data from public companies around the world
• information about M&A transactions not only in Belarus, but also abroad

As a result, you will receive an array of data for different companies, regions, etc. Now the task is to choose the correct peer companies on the basis of which you will make your assessment. For this you need:

1. Identify a broad sample of companies based on general criteria that characterize your company (industry, region, revenue, product or service).

Let's look at our company "A". Using data on public businesses, we will compile a list of companies involved in the production of shoes in Europe. Here are 11 companies that, in their main characteristics, are similar to ours.

2. The next step is to narrow down this list using niche criteria. This includes market share, level of competition, management team, growth potential, financial performance, etc.

In our example, we will adjust the sample based on financial indicators. Companies with revenue from $30 million to$ 150 million. So, we got 5 companies (highlighted in dark). Revenue figures are in $ million.

The next step is the choice of a multiplier, on the basis of which we will evaluate our company.

Historically, there have been 3 types of multipliers:

• interval(determines the value of a company based on its performance and is the most common, such as EV/EBITDA)
• moment(the value is determined based on the performance of the company at the reporting date, for example, from the statement of financial position)
• branch(there are specific multipliers for each industry, for example, the number of wells for an oil company)

Suppose, as a result, you have a sample of 5 peer companies, and each of them has its own multiplier value. The next goal is to determine the value of the multiplier for your company based on the data obtained. For this you need:

1. Cut off extreme and/or unrepresentative values ​​of peer company multiples.

After reviewing more detailed data, we found that the multiple for Fenghua SoleTech AG is not representative.

2. "Weigh" intermediate results

After analyzing the remaining companies, we came to the conclusion that based on the region, strategy, market share, financial indicators, we should use the following weights to calculate the multiplier.

As a result, we got that the multiplier for our company "A" is 6.296.

3. Make final adjustments(for example, discounts by region).

We must understand what fundamental dependencies affect the formation of the multiplier.

This dependence is expressed by a formula that at first glance seems terribly complex.

EV/EBITDA = f(G,Ke,MARG,T) = f(G,BETA,DUM,MARG,T)

In fact, this formula answers the fundamental question: “What determines the value of your company?”.

It depends on:

• the marginality of your business, that is, the net profit margin (abbreviation "MARG")
• from the country in which your company operates (indicated by the abbreviation "DUM")
• from the industry in which you work (in our formula it is "BETA")
• from the tax rate that falls on your company ("T" - in our formula)
• the company's growth potential in the coming years (we use it as a G variable)
• company's cost of equity (usually denoted by the symbol "Ke")

Thus, the company's value is affected not only by internal factors (the amount of equity capital, profitability, etc.), but also by external ones - for example, the so-called "country risks".

Each country causes certain risks for the investor.

In the same way, industry risk is determined, which also affects the company's valuation.

Let's calculate the adjustments for our company "A". Initially, our multiplier was set at 6.296. Let's look at the risks: we can exclude some of the risks and variables, for example, the country risk, because practically all companies from Poland got into the field of our comparison.

If we assume that the profitability of our company is somewhat lower than the industry average in Poland, then we need to take into account the discount on profitability. In addition, Company A does not have audited financial statements in accordance with international standards. In this connection, it is necessary to make a discount to our calculated multiplier.

As a result, our company will cost 5.91 EBITDA.

Thus, in the example of the conditional company "A", we see that the cost depends on many variables and contexts that are important to consider.

You can see how different estimates can differ for the same company on the Deal simulator.

All in all, valuing a company is as exciting as playing chess.

Viktor Denisevich

He is engaged in market analysis, financial due diligence, preparation of analytical data for the board of directors, actively participates in the development of financial models of strategies.

In 2013 he received the ACCA certificate (dipIFR). Currently undergoing CFA training.