Analysis of business valuation involves a certain, rather labor-intensive process, helping the owner to determine the value of a company, company or a certain enterprise. It may be required in different situations. An assessment of the market value of a business may be required in one or another case, since the manager must know this indicator in order to make decisions related to the sale or acquisition of property rights. We can say that such an assessment is the result of the work carried out by the company throughout its entire existence.
Features
Assessment of the value of a business is a concept that means the fulfillment of certain tasks.
Initially, it consists in the analysis of a controlling stake in an enterprise or company. The solution to this problem allows you to get the correct and most clear idea of the price of the entire business.
After that, an assessment of the block of shares, called minority, is carried out. The property complex is also evaluated. In this case, special attention is paid to business assets. As such, there are various buildings, structures, networks, vehicles, land, equipment. In addition to property, the company's financial routes are also evaluated. In addition to all of the above, the market state, as well as the state of discount, is also determined. This process is usually called the valuation of shares of the company listed on the market.
Business as a commodity
Assessment of the value of the business is carried out and subject to its perception as a product. When opening a company, a certain capital is invested in it, which in the future must be returned. Moreover, the object of assessing the value of a business, whether it is a company or an enterprise of any field of activity, should be profitable, otherwise it makes no sense to base it. Initially, it is not known how much revenue will be received, so opening any business is a risky event. However, modern methods of assessing the value of a business make it possible to obtain information on future profitability in advance, after which a final decision can be made.
By itself, a business represents a certain system, which can be implemented within the market framework as a separate element, a whole complex, or a subsystem. A product can be called either the whole enterprise, or its individual elements. The mass of external and internal factors affects the level of profitability and the needs of a particular business.
It is customary to attribute to the external the unstable economic situation in the country, which quite often happens. This causes some business instability. The state is obliged to take this into account in the regulation of business processes. Often a company is able to influence the market industry or the market as a whole. Therefore, he is able to influence the economic situation in the country.
The importance of assessment activities
Business valuation is a necessary and useful procedure. This can be proved by certain examples of what this procedure gives:
- with its help, business management can become much more effective;
- with its help, you can easily make certain investment decisions;
- through evaluation, you can create a productive business plan;
- through business valuation, you can smoothly proceed with the reorganization of the company;
- with its help, you can identify how creditworthy the firm is;
- assessment allows tax optimization of the business.
Methods for assessing business value involve several stages. To begin with, documentation is collected that provides the necessary information about the company or enterprise. Next, an analysis and a complete study of the market on which the firm's activity is based is carried out. At the next stage, the time comes for settlement operations. Next, it is necessary to approve the results obtained as a result of the previous procedure. And at the last step, a report is compiled, which serves as an assessment of the business.
Basic techniques
An enterprise or firm is evaluated using three approaches: profitable, costly and comparative. You can describe each of them in general terms, and then consider in more detail.
Cost approach involves the assessment of costs incurred by the business. Very often the book value of assets does not match the market price. In this case, the assessment of the enterprise is a thorough and detailed revaluation. This method has one advantage - it is based on real assets.
Comparative analysis involves comparing the evaluated business with a similar company or company currently present on the market. Information is consumed from transactions relating to assets, stock markets and the absorption market.
There is also a profitable approach. Assessment of business value in this case is carried out after calculating the income expected from the operation of the enterprise. The main factor determining business valuation to a large extent is the company's profitability. It turns out that the higher the profit, the higher the final assessment of the value of the business.
A bit of history
Assessing the value of an enterprise’s business can be quite useful not only for the seller, but also for the buyer. There is quite curious information regarding this fact. This applies to those moments that were previously little known to anyone. That is why it is worth a little plunge into history.
It is quite difficult to determine exactly when the appraisal services in this area appeared, as well as who offered them for the first time. However, modern approaches to assessing business value were laid back in the twenties of the last century in America. It was at that time in the United States that a ban on alcohol was issued, which everyone knows about, which caused a collapse in the alcohol market. At that time, it seemed that there was no point in evaluating a business, but the economy would not have become a market economy if its participants had not looked for alternative ways.
The cost of the alcohol business was estimated quite soon after the “wine-vodka” collapse. Many factories that were involved in the production of alcoholic beverages received tax benefits from the state in 1920 for the damage they suffered. Of course, all companies were of different sizes, so the amount of benefits was required different, at the same time everything had to be justified by law, so as not to leave anyone offended. It was at this time that an assessment of the business value of the enterprise was required. It was then that the terms that were still actively used, for example, “goodwill” or the value of goodwill, which implied the valuation of intangible assets, arose.
Such principles of assessing the value of a business take into account a whole set of factors that give an idea of the future increase in the profitability of a particular company in comparison with the average indicators of similar companies. The business assessment necessarily takes into account such important points as the company's reputation, brand recognition, favorable location and others. Even now, most are confident that such a study is based on such basic concepts as debts and assets.
But we have already become accustomed to the fact that valuation is often represented by a variety of forms, among which the most noticeable are the measurements of the amount of money and income received with the help of this business, which are currently being received and expected in the future. However, when it comes to the value of business reputation, professionals try to take into account such things as the stability of the working staff, the name of the brand, as well as other equally important factors that can greatly affect the final results that an assessment of the value of a business gives.
How did they start to count?
All these conclusions and innovations became the basis for a memorandum in America in the twenties, which set forth fundamentally new ideas in evaluating business. They concerned intangible value. It turns out that the modern principles of assessing the value of business were laid down a century ago, and they turned out to be so reasonable that they spread around the world, gaining many fans, amendments, improvements, innovations and developments. It turns out that the expert assessment of the business at the moment is an important point for enterprises that care about the profitability of their activities.
So, you can give an example of assessing the value of a business in order to better understand what is meant by this process. Suppose you became the owner of the shares of some large company A. Of course, you are interested in the value of your stake. To do this, you will read newspapers, study information on the Internet to get an idea of the value of shares, which will be appropriate to request if you want to sell securities. In this case, there is no assessment of the business of the enterprise.
In addition, if we are talking about a private company, then completely different laws apply, unknown to an unscrupulous or inexperienced appraiser. Because of this, quite often there is confusion in the process of evaluating a business, as well as errors typical for this process appear. Several common myths in this area can be listed.
Myth One
An assessment of the business value of an enterprise should be made only when it is ready for sale, or the creditor needs to carry out this procedure before seizing the property in order to secure the debt. Of course, this reason is the most common and most important. If before such a moment, the cost of a business has never been evaluated, then you can be completely sure that its owner was not interested in issues related to minimizing property costs, planning land ownership, and others. If the business should continue to generate income in the future, then the owner should be interested in its assessment.
Second myth
The owner of the enterprise knows that the cost of business in this industry is equal to the double annual income of the company. Therefore, he is convinced that there is no need to hire an outsider in order for him to assess the value of the business. Of course, such indicators exist, and they are especially common among brokers, economic observers and other specialists who are used to compiling averaged lists, adhering to intermediate indicators even in such delicate issues.
But one should also determine what the “average indicator” hides underneath? This term implies that part of the enterprises is below this level, and part above. It turns out that the generalized statistics are indicators for identifying certain results, but they are not able to talk about any specific transaction.
Each individual business is individual, so the assessment should be developed for this particular case, using a special project, and not according to some template. Otherwise, there is a high probability of disputes, omissions and inaccuracies.
Myth three
A competitor sold his business 6 months ago at a price equal to the company's triple annual income. Your business is no worse, therefore you are not ready to set a lower price for it. This myth also needs to be dispelled. Naturally, you need to be confident in yourself and your own business, but what happened six months ago may not be relevant at the moment.
Valuation and management of business value requires answering several questions:
- What is the current profit?
- What is the planned profit growth in the future?
- What is the profitability expected by potential buyers who have acquired your business?
During the assessment, it is very important to be aware not only of the internal indicators of losses and profits of the company, but also in general in the economic situation, both within the country and the whole world. It turns out that the assessment and management of business value involves taking into account not only local indicators and information from accounting, not only data on the closest competitors, but also more comprehensive and global facts.
Myth Four
It is believed that the value of a business is directly dependent on the objectives of its evaluation. Naturally, there is endless talk about some one-sidedness and bias of the assessments. That which will be very beneficial for the seller is disadvantageous for the buyer, and vice versa.
The goals of assessing the value of a business are such that they do not provide any benefits to a particular person, but do everything objectively. Ideally, when conducting a qualitative assessment, you will receive the so-called market value of the enterprise. The cost can be called fair only if the buyer and seller have information about all the conditions of the transaction, and know what and how is happening on the market at the moment. In this case, none of the parties should conclude an agreement on coercion.
Only in this case, an assessment of the company's business value will allow both parties to find out everything that they need. All justifications should be relevant to the current situation, as this expert opinion will not be forwarded by anyone.
Fifth myth
If a business causes a loss, then there is no point in evaluating it. In fact, private companies, which are considered in large numbers, may not be too profitable in comparison with colleagues. When assessing, a study is made of all the movements of capital of the company, which allows us to find out not only the size of the profit, but also the profitability of investment capital. This term refers to the ratio of net operating profit to the average total capital invested in an enterprise or a certain type of activity, that is, the quotient of dividing net operating profit by investment. This is a complex issue, the solution of which not every businessman can master. It is for this purpose that the assessment of the investment value of a business is usually carried out by third-party companies that have been specializing in this field for several years.
The seller through an assessment of the business of the enterprise will be able to convince the buyer of the legitimacy and legal literacy of the transaction, as well as justify the price that he asks. Do not forget only that these activities should be carried out repeatedly.
Business Valuation Objectives
In this case, we can highlight several of the most significant points. Through this assessment, you can determine the value of the company. Many entrepreneurs do not realize how much their business can really cost. Assessment companies are able to help solve this issue.
The basics of assessing the value of a business are such that they allow the firm to find its market niche in which it will be well oriented. Every businessman needs to know how things are in the market, as well as how colleagues and competitors work, what consumers demand. It is the submission of information about the current situation that is one of the responsibilities of firms involved in business valuation.
Evaluation and management of business value is required to identify the current financial situation of the company, to make some kind of internal diagnosis, which is required to be listened to in order to use the correct methods of treatment or prevention.
A conscientious entrepreneur is interested in holding such events, as they help not only broaden their horizons, but also give an idea of the current situation in commercial circles. An appraisal professional will provide you with complete information on how the situation in the country and in the world, in your industry is changing, as well as what changes your company is undergoing, even if it is very conservative. Previously, you can show an example of assessing business value.
The information that is obtained in the process of these activities is indispensable for use in the courts, as well as in the regulation of issues that involve taxation or financing. The assessment can be your reliable witness or an indispensable assistant consultant. An income approach can be used for this.
Assessing the value of a business, if it is conducted regularly, will come in handy in a situation where an urgent decision is required on the purchase, sale or merger of companies. Sometimes it happens that all this information is required here and now, otherwise the deal may be broken, so there is simply no time left to call the appraisers and conduct their work. If you have documents in your hands containing information on the current assessment, then it will be quite simple to use them, you only need to make certain amendments to them.
conclusions
Business is not a simple phenomenon that we face every day. Own enterprise is a business that requires not only financial, but also time costs, providing the present and future for you and your family. Therefore, it is important to conduct any assessment activities regularly, using professional resources that set the necessary tasks.
Business valuation by real experts provides important and useful information that is useful in various situations. This may be the need to conclude some kind of transaction, selling a company, debating with tax authorities or finding investors who are interested in knowing that your business can increase their capital, and here various approaches to assessing the value of a business are used.