Calculation of the enterprise value using the income approach. An example of business (enterprise) valuation using the income approach. Choosing the amount of profit to be capitalized

Three methods are used to value an enterprise in its sale, merger or liquidation. Each of them has its own characteristics and scope.

The most popular is the income approach, all the nuances of which will be discussed further.

What is it?

The essence of the approach is business valuation based on the determination of the company's expected income. This method is the main one and is most often used to establish the value of enterprises.

The bottom line is that the size of a 100% stake is calculated as the estimated value of future benefits, determined by the rate of return. This takes into account the degree of investment risk.

This fact allows us to recognize the profitable method as the most rational, as well as to evaluate with its help a business of any industry and size.

The appraiser, during the analysis, studies the market, calculates all possible benefits in order to obtain the real value of the business. The approach involves the use of establishing the value of all future profits the investor can receive after the acquisition of the organization. Determining the price of the company, the specialist must:

  • set a forecast period for future profits;
  • choose the most optimal calculation method;
  • determine the future price of the enterprise at the end of the forecast period, that is, the terminal cost.

The difference from other approaches lies in the assumption that a future investor or buyer cannot pay more for an organization than it will bring him income in the future.

The value of the company, determined in this way, is influenced by several factors. These include:

  • investment risks - they depend on the territorial location, scope of activity, features of the development of the company;
  • the amount of income an asset can generate over its useful life.

The approach has its advantages and disadvantages associated with the nuances of application. The positive aspects of use include:

  • the influence of the market is taken into account, since the discount rate is involved in the calculations;
  • the enterprise is presented to the investor or buyer as a source of income, not costs.

The negative aspects include:

  • subjectivity of the established discount rate;
  • the difficulty of accurately predicting future earnings.

Income method can not always be applied. Sometimes the appraiser comes to the conclusion that this option is irrational and does not show the real value of the enterprise. In this case, you need to use one of the other two approaches.

You can learn more about how companies are valued in the following video:

Applied methods

Business valuation using this approach is carried out by one of two methods. Each has its own characteristics and structure of calculations.

Discount method

This method involves the analysis of all the income of the enterprise and development strategies for a certain period. The result of the calculations is the reduction of future income to the current value.

The assessment is carried out in several stages. Calculating the value of the enterprise is quite time-consuming and complex, but this method is considered the best. Read more about it in.

Capitalization Method

It is used if the company's income is stable and their growth rate is predictable. The method consists in establishing the amount of annual income, determining the appropriate capitalization rate. Based on these data, the market value of the company's capital is calculated.

The main idea can be expressed by the formula:

C=N/K, where:

  • N - net profit;
  • K is the established capitalization ratio.

The coefficient can be determined by the formula:

K = r - g, where

  • r - discount rate;
  • g - growth rate of cash flow.

Valuation by the capitalization method is carried out in several stages:

  1. The financial statements of the enterprise are analyzed.
  2. The amount to be capitalized is selected. It can be profit both before and after taxation.
  3. The capitalization rate is calculated.
  4. The preliminary cost of the enterprise is established.
  5. An adjustment is being made. This takes into account the lack of liquidity, the nature of the estimated share.

Direct capitalization is used in some cases:

  • if the appraiser has all the necessary data to assess the company's profit;
  • The entity's real estate income is stable, or future revenues are expected to be approximately equal to current ones, for example, the entity's buildings are leased to another entity.

The method has its advantages and disadvantages. The advantages include the following points:

  • Ease of calculation. A simple formula greatly facilitates the necessary calculations.
  • The method reflects the market situation. This nuance is associated with the peculiarities of the evaluation method. The procedure requires a detailed analysis of a large number of market transactions, a comparison of income and the value of invested funds.


At the same time, the technique also has limitations:

  • The method is not intended for calculating the value of an enterprise in a crisis market. The disadvantage of its application is the assumption that the income of the organization will be uniform. The instability of the economic situation in the industry, country or the world as a whole directly affects the level of future business profits.
  • Using a lot of information. If the appraiser cannot obtain complete and reliable information about the transactions carried out in the market, he will have to take a different approach.
  • The method can be used only with a stable business. If the firm does not yet have a uniform level of income, the use of capitalization is impossible, since the main requirement that ensures the correctness of the forecast is not satisfied. Also, the method is not suitable for enterprises that are currently in the process of restructuring or anti-crisis management.

When calculating, the evaluator may encounter two problems:

  • determining the amount of the company's net income - for this you need to choose the right forecasting period;
  • choice of rate - you need to take into account the amount of net profit.

Usage income approach is a fairly convenient way to calculate the market value of the capital of enterprises whose profits are stable from year to year.

When evaluating an organization from the standpoint income approach the organization itself is considered not as a property complex, but as a business, a business that can make a profit. The valuation of the organization's business using the income approach is the determination of the present value of future income that will arise as a result of the use of the organization and (or) its possible further sale. Thus, the assessment from the standpoint of the income approach largely depends on the prospects for the business of the organization being assessed. When determining the market value of an organization's business, only that part of its capital that can generate income in one form or another in the future is taken into account. At the same time, it is very important to know at what stage of business development the owner will begin to receive income and what risk this entails.

The greatest difficulty in evaluating the business of a particular organization from the standpoint of the income approach is the process of forecasting income and determining the discount rate (capitalization) of future income. The advantage of the income approach in business valuation is that it takes into account the prospects and future conditions of the organization's activities (pricing for goods, future capital investments, market conditions in which the organization operates, etc.).

The income approach is represented by two main valuation methods - the discounted cash flows and the profit capitalization method (see Figure 12.1).

Estimating the value of the organization's business by the method discounted cash flows (Discounted Cash Flow, DCF)(DCF) is most widely used under the income approach. This method is based on the assumption that a potential buyer will not pay more for an organization than the present value of future earnings from the organization's business, and the owner will not sell his business for less than the present value of projected future earnings. As a result of the interaction, the parties will come to an agreement on a price equal to the present value of the organization's future income.

Evaluation of an organization using the DCF method consists of the following steps:

  • - choice of cash flow model;
  • - determination of the duration of the forecast period;
  • - retrospective analysis of sales volume and its forecast;
  • - forecast and analysis of expenses;
  • - forecast and analysis of investments;
  • - calculation of cash flow for each forecast year;
  • - determination of the discount rate;
  • - calculation of the value in the post-forecast period;
  • - calculation of the current values ​​of future cash flows and their value in the post-forecast period;
  • - making final corrections.

The choice of cash flow model depends on whether there is a need to distinguish between own and borrowed capital. The difference is that interest on debt servicing can be allocated as an expense (in the cash flow model for equity) or included in the income stream (in the model for total invested capital). Accordingly, the amount of net profit changes.

The duration of the forecast period in countries with developed market economies is usually five to ten years, and in countries with economies in transition, in conditions of instability, it is permissible to reduce the forecast period to three to five years. As a rule, the period up to a stable growth rate of the organization is taken as the forecast period, and it is also assumed that a stable growth rate takes place in the post-forecast period.

A retrospective analysis and forecast of sales volume requires consideration and consideration of a number of factors, the main ones being production volumes and commodity prices, demand, growth rates, inflation rates, investment prospects, the situation in the industry, the organization's market share and the general situation in the economy. The sales forecast should be logically consistent with the history of the organization's business.

At the stage of forecasting and analyzing costs, it is necessary to study the structure of the organization's costs, in particular the ratio of fixed and variable costs, estimate inflation expectations, exclude non-recurring items of expenditure that will not occur in the future, determine depreciation charges, calculate interest costs on loans, compare projected costs with corresponding indicators from competitors or industry averages.

The forecast and analysis of investments includes three main components: own working capital - "working capital", capital investments, financing needs.

The calculation of cash flow for each forecast year can be performed by two methods - indirect and direct. indirect method focused on motion analysis Money by areas of activity. direct method based on the analysis of cash flow by items of income and expense, i.e. on accounting accounts.

The definition of the discount rate (the interest rate for converting future earnings into present value) depends on what type of cash flow is used as the basis. For cash flow from equity, a discount rate is applied, which is determined by the owner as the rate of return on equity. For the cash flow from all invested capital, a discount rate is applied equal to the sum of the weighted rates of return on equity and borrowed funds, where the weights are the shares of borrowed and own funds in the capital structure.

For cash flow from equity, the most common methods for determining the discount rate are the cumulative construction method and the capital asset pricing model. For cash flow from total invested capital, the weighted average cost of capital model is usually used.

When determining the discount rate using the cumulative method, the calculation base is the rate of return on risk-free securities, to which is added additional income associated with the risk of investing in this type of securities. Then adjustments are made (in the direction of increase or decrease) for the effect of quantitative and qualitative risk factors associated with the specifics of this company.

According to the capital asset valuation model (Capital Assets Pricing Model,САРМ) the discount rate is determined by the formula

where R- the rate of return on equity required by the investor;

RF- risk-free rate of return;

R m- total profitability of the market as a whole (average market portfolio of securities);

P is the beta coefficient (a measure of the systematic risk associated with the macroeconomic and political processes taking place in the country);

  • 51 - award for small organizations;
  • 52 - premium for the risk characteristic of an individual company;

FROM- country risk.

According to the weighted average cost of capital model, the discount rate ( Weighted Average Cost of Capital, WACC) is defined as follows:

where kd- the cost of borrowed capital;

tc- income tax rate;

wd- the share of borrowed capital in the capital structure of the organization;

kp- the cost of raising equity capital (preferred shares);

wp- the share of preferred shares in the organization's capital structure;

ks- the cost of raising equity capital (ordinary shares);

ws- share of ordinary shares in the organization's capital structure.

The calculation of the value in the post-forecast period is made depending on the prospects for business development in the post-forecast period, using the following methods:

  • - calculation method according to salvage value(if in the post-forecast period the company is expected to go bankrupt with the subsequent sale of assets);
  • - method of calculation based on the value of net assets (for a stable business with significant tangible assets);
  • - the method of the proposed sale (recalculation of the projected cash flow from the sale into the current value);
  • - Gordon's method (income of the first post-forecast year is capitalized into value indicators using the capitalization ratio calculated as the difference between the discount rate and long-term growth rates).

Calculation of the current values ​​of future cash flows and value in the post-forecast period is made by summing up the current values ​​of income that the object will bring in the forecast period, and the current value of the object in the post-forecast period.

The introduction of final adjustments is associated with the presence of non-functional assets that do not participate in generating income, and their impact on the actual value of equity working capital. In the case of valuation of a non-controlling stake, allowance must be made for the lack of control.

The discounted future cash flow method is applicable to income-producing organizations with a certain history economic activity, with unstable income and expenditure streams. This method is less applicable to the valuation of the business of organizations suffering systematic losses. Some caution should also be exercised in the application of this method when evaluating the business of new organizations, since the lack of a retrospective of earnings makes it difficult to objectively predict future cash flows.

The application of the discounted cash flow method is a very complex and time-consuming process, but it is recognized throughout the world as the most theoretically justified. In countries with developed market economies, this method is used in 80-90% of cases when evaluating large and medium-sized organizations. Its main advantage is that it takes into account the prospects for the development of the market in general and the organization in particular, which is most in the interests of investors.

Profit capitalization method is that the estimated value of the business of the operating organization is considered equal to the ratio of net profit to the chosen capitalization rate:

where V- business value;

I- the amount of profit;

R- capitalization rate.

The earnings capitalization method is usually used when there is sufficient data to determine current cash flow and the expected growth rate is moderate or predictable. This method is most applicable to organizations that bring stable profits, the value of which varies little from year to year or its growth rate is constant. The profit capitalization method in Russia is used quite rarely and mainly for small organizations, since for most large and medium-sized organizations there are significant fluctuations in profits and cash flows over the years.

The process of business valuation using the profit capitalization method includes the following steps:

  • - analysis of the organization's financial statements;
  • - determination of the amount of profit to be capitalized;
  • - calculation of the capitalization rate;
  • - determination of the preliminary value of the organization's business value;
  • - making final corrections.

The analysis of the financial statements of the organization is carried out on the basis of the balance sheet and the report on financial results. It is necessary to normalize them, make adjustments for one-time and extraordinary items that were not regular in the past activities of the organization and the likelihood of their repetition in the future is minimal. In addition, it may be necessary to transform financial statements in accordance with generally accepted standards. accounting (Generally Accepted Accounting Principles, GAAP).

When determining the amount of profit to be capitalized, the time period for which the profit is calculated is selected:

  • - profit of the last reporting year;
  • - profit of the first forecast year;
  • - the average amount of profit for the last three to five years.

The most part is used profit of the last reporting

The calculation of the capitalization rate is usually made on the basis of the discount rate by subtracting the expected average annual growth rate of earnings. To determine the discount rate, the methods already described when considering the discounted cash flow method are most often used: the capital asset valuation model, the cumulative construction model and the weighted average cost of capital model.

If necessary, make final adjustments for non-functional assets, lack of liquidity, as well as for a controlling or non-controlling stake in the shares or shares being valued.

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The income approach is considered the most acceptable from the point of view of investment motives, since any investor who invests money in an existing enterprise ultimately buys not a set of assets consisting of buildings, structures, machinery, equipment, intangible assets, etc., but a stream of future income, allowing him to recoup the invested funds, make a profit and increase his well-being. From this point of view, all enterprises, no matter what sectors of the economy they belong to, produce only one type of marketable products-- money.

The income approach is a set of methods for estimating the value of the appraisal object, based on the determination of expected income from the appraisal object. business profitable international

The expediency of applying the income approach is determined by the fact that the summation of the market values ​​of the assets of the enterprise does not reflect the real value of the enterprise, since it does not take into account the interaction of these assets and the economic environment of the business.

The income approach provides for the establishment of the value of a business (enterprise), an asset or a share (contribution) in equity capital, including authorized capital, or a security by calculating the expected income reduced to the date of valuation. This approach is used when it is possible to reasonably determine the future cash income of the enterprise being valued.

Methods of the income approach to business valuation are based on the determination of the present value of future income. The main methods are:

  • - income capitalization method;
  • - method of discounting cash flows.

When assessing the income capitalization method, the level of income for the first forecast year is determined and it is assumed that income will be the same in subsequent forecast years (in the case of using the discounted cash flow method, the level of income for each year of the forecast period is determined).

The method is used in evaluating enterprises that have managed to accumulate assets that bring a stable income.

If it is assumed that future earnings will change over the years of the forecast period, when enterprises implement an investment project that affects cash flows or are young, the discounted cash flow method is applied. Determining the value of a business by this method is based on the separate discounting of multi-temporal changing cash flows.

It is assumed that the potential investor will not pay for this business an amount greater than the present value of future earnings from that business, and the owner will not sell his business for less than the present value of projected future earnings. As a result of the interaction, the parties will come to an agreement on a market price equal to the present value of future income.

Cash flows are a series of expected periodic receipts of cash from the activities of the enterprise, and not a lump sum receipt of the entire amount.

The market valuation of a business largely depends on its prospects. It is the prospects that allow you to take into account the method of discounting cash flows. This valuation method is considered the most appropriate in terms of investment motives and can be used to evaluate any operating enterprise. There are situations when it objectively gives the most accurate result of assessing the market value of an enterprise.

The results of the income approach allow business leaders to identify problems that hinder business development; make decisions aimed at increasing income.

Consider the practical application of the profit capitalization method by stages:

  • - analysis of the financial statements of the enterprise;
  • - determination of the amount of profit to be capitalized;
  • - calculation of the capitalization rate;
  • - determination of the preliminary value of the enterprise's business value;
  • - making final corrections.

The analysis of the financial statements of the enterprise is carried out on the basis of the balance sheet of the enterprise and the income statement. It is desirable to have these documents for at least the last three years. When analyzing the financial documentation of an enterprise, it is necessary to normalize it, i.e. make adjustments for non-recurring and extraordinary items, both in the balance sheet and in the income statement, that were not of a regular nature in the past activities of the enterprise and are unlikely to be repeated in the future. In addition, if the need arises, you can transform financial statements enterprises, i.e. present it in accordance with generally accepted accounting standards.

Determining the amount of profit that will be capitalized is in fact the choice of the time period for which profit is calculated:

  • - profit of the last reporting year;
  • - profit of the first forecast year;
  • - the average profit for the last 3-5 years.

In most cases, the profit of the last reporting year is used.

The calculation of the capitalization rate is usually based on the discount rate by subtracting the expected average annual earnings growth rate. The following methods are most often used to determine the discount rate:

  • - a model for valuation of capital assets;
  • - model of cumulative construction;
  • - weighted average cost of capital model.

Determining the preliminary value of the enterprise's business is carried out according to a simple formula:

V - cost;

I - the amount of profit;

R - capitalization rate.

Final adjustments (if necessary) are made for non-functional assets (those assets that do not participate in generating income), for lack of liquidity, for a controlling or non-controlling stake in the shares or shares being evaluated.

The earnings capitalization method is commonly used when valuing an enterprise's business when there is sufficient data to determine normalized cash flow, current cash flow is approximately equal to future cash flows, and expected growth rates are moderate or predictable. This method is most applicable to enterprises that bring stable profits, the value of which varies little from year to year (or the rate of profit growth is constant). Unlike real estate valuation, this method is rarely used in business valuation of enterprises and mainly for small enterprises, due to significant fluctuations in profits or cash flows over the years, which is typical for most large and medium-sized enterprises.

The valuation of an enterprise's business using the discounted cash flow method is based on the assumption that a potential buyer will not pay for this enterprise an amount greater than the present value of the future income from the business of this enterprise. The owner will most likely not sell his business for less than the present value of projected future earnings. As a result of the interaction, the parties will come to an agreement on a price equal to the present value of the future income of the enterprise.

The valuation of an enterprise using the discounted cash flow method consists of the following steps:

  • 1. choice of cash flow model;
  • 2. determination of the duration of the forecast period;
  • 3. retrospective analysis and forecast of gross proceeds;
  • 4. forecast and analysis of expenses;
  • 5. forecast and analysis of investments;
  • 6. calculation of cash flow for each forecast year;
  • 7. determination of the discount rate;
  • 8. calculation of the value in the post-forecast period.
  • 9. calculation of current values ​​of future cash flows and value in the post-forecast period;
  • 10. introduction of final amendments.

The choice of cash flow model depends on whether it is necessary to distinguish between equity and debt capital or not. The difference is that the interest on servicing debt capital can be allocated as an expense (in the cash flow model for equity) or included in the income stream (in the model for the total invested capital), the value of net income changes accordingly.

The duration of the forecast period in countries with developed market economies is usually 5-10 years, and in countries with economies in transition, in conditions of instability, it is permissible to reduce the forecast period to 3-5 years. As a rule, a forecast period is taken until the enterprise's growth rate stabilizes (it is assumed that there is a stable growth rate in the post-forecast period).

A retrospective analysis and forecast of gross revenue requires consideration and consideration of a number of factors, the main ones being production volumes and prices for products, demand for products, retrospective growth rates, inflation rates, capital investment prospects, the situation in the industry, the company's market share and overall situation in the economy. The gross revenue forecast should be logically consistent with the company's historical business performance.

Forecast and analysis of expenses. On the this stage the appraiser must study the structure of the enterprise's costs, in particular the ratio of fixed and variable costs, evaluate inflation expectations, exclude non-recurring items of expenditure that will not occur in the future, determine depreciation charges, calculate interest costs on borrowed funds, compare projected costs with corresponding indicators from competitors or industry averages.

The forecast and analysis of investments includes three main components: own working capital ("working capital"), capital investments, financing needs and is carried out, respectively, on the basis of the forecast of individual components of own working capital, based on the estimated remaining life of the assets, based on the financing needs of existing debt levels and debt repayment schedules.

Calculation of cash flow for each forecast year can be done by two methods - indirect and direct. The indirect method analyzes the cash flow by line of business. The direct method is based on the analysis of cash flows by item of income and expense, i.e. on accounting accounts.

The definition of the discount rate (the interest rate for converting future earnings into present value) depends on what type of cash flow is used as the basis. For cash flow to equity, a discount rate equal to the owner's required rate of return on equity is applied; for cash flow for all invested capital, a discount rate is applied equal to the sum of the weighted rates of return on equity and borrowed funds, where the weights are the shares of borrowed and equity in the capital structure.

For cash flow to equity, the most common methods for determining the discount rate are the cumulative construction method and the capital asset pricing model. For cash flow for all invested capital, the weighted average cost of capital model is usually used.

When determining the discount rate using the cumulative method, the calculation base is the rate of return on risk-free securities, to which is added the additional income associated with the risk of investing in this type of securities. Then adjustments are made (in the direction of increase or decrease) for the effect of quantitative and qualitative risk factors associated with the specifics of this company.

In accordance with the capital asset valuation model, the discount rate is determined by the formula:

R = Rf + in(Rm - Rf) + S1 + S2 + C

R is the rate of return on equity required by the investor;

Rf is the risk-free rate of return;

Rm - total market return as a whole (average market portfolio of securities);

c - coefficient beta (measure of systematic risk associated with macroeconomic and political processes taking place in the country);

S1 - premium for small enterprises;

S2 is the premium for the risk characteristic of an individual company;

C - country risk.

According to the weighted average cost of capital model, the discount rate is determined as follows:

WACC = kd x (1 - tc) x wd + kpwp + ksws ,

kd - the cost of borrowed capital;

tc - income tax rate;

wd - the share of borrowed capital in the capital structure of the enterprise;

kp - the cost of raising equity capital (preferred shares);

wp - the share of preferred shares in the capital structure of the enterprise;

ks - the cost of raising equity capital (ordinary shares);

ws - the share of ordinary shares in the capital structure of the enterprise.

The calculation of the value in the post-forecast period is made depending on the prospects for business development in the post-forecast period, using the following methods:

  • - the method of calculating the liquidation value (if the company is expected to go bankrupt in the post-forecast period, followed by the sale of assets);
  • - method of calculation based on the value of net assets (for a stable business with significant tangible assets);
  • - the method of the proposed sale (recalculation of the projected cash flow from the sale into the current value);
  • - Gordon's method (income of the first post-forecast year is capitalized into value indicators using a capitalization ratio calculated as the difference between the discount rate and long-term growth rates).

Calculation of the current values ​​of future cash flows and value in the post-forecast period is made by summing up the current value of income that the object brings in the forecast period and the current value of the object in the post-forecast period.

Making final adjustments - usually, these are adjustments for non-functional assets (assets that do not take part in generating income) and for the actual amount of working capital. If a non-controlling stake is valued, allowance must be made for the lack of control.

The discounted future cash flow method is used when an entity's future cash flows are expected to be materially different from current levels, where future cash flows can be reasonably estimated, future cash flows are projected to be positive for most of the forecast years, and cash flows in the last year of the forecast period will be a significant positive value. In other words, this method is more applicable to income-producing enterprises with a certain history of business activity, with unstable income and expense flows.

The discounted cash flow method is less applicable to the valuation of the business of enterprises that suffer systematic losses (although the negative value of the business value may be an argument for making one or another decision). Some caution should also be exercised in the application of this method when evaluating the business of new ventures, as the absence of a retrospective of profits makes it difficult to objectively forecast future cash flows.

The discounted cash flow method is a very complex and time-consuming process, but it is recognized throughout the world as the most theoretically sound method for valuing the business of operating enterprises. In countries with developed market economies, when evaluating large and medium-sized enterprises, this method is used in 80 - 90% of cases. The main advantage of the method is that it is the only known valuation method that is based on the prospects for the development of the market in general and the enterprise in particular, and this is most in the interests of investors.

The mechanism of business value management is based on the assumption that the value of a company is determined by its ability to generate cash flow over a long period of time. And its ability to generate cash flow (and therefore create value) is, in turn, determined by factors such as long-term growth and the return that the company gets from its investment over and above the cost of capital.

Thus, the income approach, in accordance with the International Valuation Standards (clause 6.7.2 MP6 of the IVS), provides for the establishment of the value of a business, a share in the ownership of a business or a security by calculating the value of the expected benefits reduced to the current moment.

The two most common methods according to International Valuation Standards under the Income Approach are:

Capitalization of income;

Discounting cash flow or dividends.













In income capitalization methods, to convert income into value, a representative amount of income is divided by the capitalization rate or multiplied by an income multiplier. In theory, there can be various definitions of income and cash flow. In the discounted future cash flow and/or dividend methods, cash receipts are calculated for each of several future periods. These receipts are converted into value by applying a discount rate using present value methods. Many definitions of cash flow can be used. In practice, net cash flow (cash flow that can be distributed to shareholders) or actual dividends (especially in the case of non-controlling shareholders) are usually used. The discount rate must be consistent with the accepted definition of cash flow. Under the income approach, capitalization rates and discount rates are derived from market data and expressed as a price multiplier (derived from publicly traded businesses or transactions) or as an interest rate (derived from alternative investment data). Expected income or benefits are converted into value through calculations that take into account expected growth and the timing of benefits, the risk associated with the benefit stream, and the time value of money. The expected income or benefits should be calculated taking into account the capital structure and past business results, business development prospects, as well as industry and general economic factors. In calculating an appropriate rate (capitalization or discount rate), the valuer should take into account factors such as the level of interest rates, rates of return (return) expected by investors from similar investments, and the risk inherent in the expected reward stream.

Method of discounting cash flows.

The market valuation of a business largely depends on its prospects. When determining the market value of a business, only that part of its capital that can generate income in one form or another in the future is taken into account. At the same time, it is very important at what stage of business development the owner will begin to receive these incomes and what risk this entails. All these factors that affect the valuation of a business can be taken into account using the discounted cash flow method (hereinafter referred to as the DCF method). Determining the value of a business using the DCF method is based on the assumption that a potential investor will not pay for this business an amount greater than the present value of future income from this business. The owner will not sell his business for less than the present value of projected future earnings. As a result of the interaction, the parties will come to an agreement on a market price equal to the present value of future income. This valuation method is considered the most appropriate from the point of view of investment motives, since any investor who invests in an operating enterprise ultimately buys not a set of assets consisting of buildings, structures, machinery, equipment, intangible assets, etc., but a flow of future income, allowing him to recoup the invested funds, make a profit and increase his well-being.

The DCF method can be used to value any operating enterprise. However, there are situations when it objectively gives the most accurate result of the market value of the enterprise. The application of this method is most justified for assessing enterprises that have a certain history of economic activity (preferably profitable) and are at the stage of growth or stable economic development.

This method is less applicable to the valuation of enterprises that suffer systematic losses (although a negative value of the business value may be a fact for making managerial decisions). Reasonable caution should be exercised in applying this method to the evaluation of new ventures, even promising ones. The lack of a retrospective of profits makes it difficult to objectively predict the future cash flows of a business.

The main stages of enterprise valuation using the discounted cash flow (DC) method:

Stage 1. Choice of cash flow model.

When valuing a business, we can use one of two cash flow models: FC for equity or FC for all invested capital. In both models, the cash flow can be calculated both on a nominal basis (at current prices) and on a real basis (taking into account the inflation factor).

Stage 2. Determining the duration of the forecast period.

The forecast period is taken until the company's growth rate stabilizes (it is assumed that in the post-forecast period there should be stable long-term growth rates or an endless stream of income). The longer the forecast period, the more reasonable from a mathematical point of view the final value of the current value of the enterprise looks, but the more difficult it is to predict specific amounts of revenue, expenses, inflation rates, cash flows. According to the practice established in countries with developed market economies, the forecast period for assessing an enterprise can be, depending on the objectives of the assessment and the specific situation, from 5 to 10 years. In countries with economies in transition, in conditions of instability, where adequate long-term forecasts are especially difficult, it is permissible to reduce the forecast period to 3 years. For the accuracy of the result, the forecast period should be split into smaller units of measurement: half a year or a quarter.

Stage 3. Retrospective analysis and forecast of gross proceeds from sales.

The analysis of gross proceeds and its forecast involve taking into account a number of factors: the range of products; production volumes and product prices; retrospective growth rates of the enterprise; demand for products; inflation rates; available production facilities; prospects and possible consequences capital investments; the general situation in the economy, which determines the prospects for demand; the situation in a particular industry, taking into account the existing level of competition; the market share of the assessed enterprise and market trends; long-term growth rates in the post-forecast period; plans of the managers of this enterprise. The general rule to follow is that the gross revenue forecast should be logically compatible with the historical performance of the enterprise and the industry as a whole.

Stage 4. Analysis and forecast of expenses.

Here, they first study the cost structure, taking into account the retrospective, including the ratio of fixed and variable costs; estimate inflation expectations for each category of costs; study one-time and extraordinary items of expenditure; determine depreciation charges based on the current availability of assets and on their future growth and disposal; calculate interest costs based on predicted debt levels; compare projected costs with corresponding indicators for competing enterprises or with similar industry averages. Costs can be classified in various ways, but two classifications of costs are important for business valuation: 1) Classification of costs into fixed and variable; 2) Classification of costs into direct and indirect (used to assign costs to a certain type of product). From the point of view of the concept of business cost management, cost analysis allows you to identify narrow places and reserves for their reduction, control the process of formation of costs, and as a result, effectively manage costs.

Stage 5 Analysis and forecast of investments.

It is necessary to carry out to compile cash flows, since the activities of the enterprise in the long run, as a rule, are accompanied by various investment costs. This may include:

Capital investment, which includes the cost of replacing existing assets as they wear out or major repairs (projected based on an analysis of the remaining life of the assets or the condition of the equipment);

Acquisition or construction of assets to increase production capacity in the future according to the development plans or business plans of the company;

The need to finance additional working capital needs (based on the forecast of changes in sales and output or according to the company's development plans);

The need to raise financing (for example, through additional issuance of securities) or to repay long-term loans (the forecast is based on a study of development plans, existing levels of debt and repayment schedules).

Stage 6 Calculation of the amount of cash flow for each year of the forecast period.

There are two main methods for calculating the amount of cash flow:

1) indirect (element-by-element) analyzes the cash flow in the areas of activity, when each component of the cash flow is predicted, taking into account management plans, investment projects, identified trends, extrapolation is possible for individual elements, etc. At the same time, the proceeds from the sale of products (works, services) are forecasted using the methods of extrapolation of industry statistics (industry growth rates) and planning. For the forecast of fixed costs - extrapolation, analysis of a fixed level of fixed costs, planning elements. To forecast variable costs, extrapolation, analysis of the retrospective share of variable costs in sales proceeds, planning elements are used.

2) The direct (holistic) method is based on a retrospective analysis of cash flow, when the values ​​of cash flow for the previous three to five years are calculated with their further extrapolation or, in agreement with the administration of the enterprise, the growth rate of cash flow as a whole is predicted. The following variation of the holistic method is usually used: first, the appraiser builds a trend for the entire forecasting period, then, if necessary, makes adjustments (for the purchase of equipment and the corresponding change in depreciation charges, for income from the planned sale of unused tangible assets, the stage of the life cycle of the enterprise, etc.) . The holistic method in the valuation report can be reflected as follows: “After studying the dynamics of cash flow over the past three years, the situation in the industry and discussing management plans, the Valuer assumed the following: the growth of the company's cash flow in the first forecast year will be 25%, in the second - 10%, by the end of the third year this growth will slow down, will amount to 3% per year and the average annual growth rate in the post-forecast period will remain at the level of 3% per year.

The element-by-element method is more accurate, but also more complex.

In cases where information for evaluation is not provided in full, it is allowed for the appraiser to use more simplified methods: the arithmetic mean method, the weighted average method.

Stage 7. Determining the discount rate.

From a technical point of view From a mathematical point of view, the discount rate is the interest rate used to recalculate future income streams (there may be several of them) into a single value of the current (today's) value, which is the basis for determining the market value of the business. In the economic sense, the role of the discount rate is the rate of return required by investors on invested capital in investment objects comparable in terms of risk. If we consider the discount rate on the part of the enterprise as an independent legal entity, separate from both the owners (shareholders) and creditors, then it can be defined as the cost of attracting capital from various sources by the enterprise.

The discount rate or cost of capital should be calculated taking into account three factors: the presence of various sources of capital raised, which require different levels of compensation; the need for investors to take into account the time value of money; risk factor. In this case, risk is understood as the degree of probability of obtaining expected future income.

There are various methods for determining the discount rate, the most common of which are:

1) If cash flow to equity is used:

Capital asset valuation model;

Cumulative construction method;

2) If using cash flow for all invested capital:

Weighted average cost of capital model.

In accordance with the capital asset pricing model (CAPM - in the commonly used abbreviation for English language) the discount rate is found by the formula:

 - coefficient beta (is a measure of the systematic risk associated with the macroeconomic and political processes taking place in the country);

R m - the total profitability of the market as a whole (average market portfolio of securities);

S 1 - premium for small businesses;

S 1 risk premium specific to an individual company;

C - country risk.

The method of cumulative construction of the considered individual discount rate differs from the capital asset valuation model only in that in the structure of this rate, the total premium for investment risks is added to the nominal risk-free rate of loan interest, which consists of premiums for individual “non-systematic” risks related specifically to this project, risks. . The calculation of the discount rate by cumulative construction can be expressed by the following formula:

where R is the rate of return required by the investor (on equity);

R f - risk-free rate of return;

S 1 , S 2 ... S n - premiums for the risk of investing in the assessed enterprise, including those associated with both general factors for the industry, economy, region, and the specifics of the assessed enterprise (risk associated with the quality of general management, risk of investment management , the risk of non-receipt of income, the risk of the illiquidity of the object, etc.).

At the same time, risk premiums are determined by experts after a thorough risk analysis for each group of factors.

As a risk-free rate of return in world practice, the rate of return on long-term government debt obligations (bonds or bills) is usually used; the rate on investments with the lowest level of risk (the rate on deposits of a bank with a high degree of return, for example, Sberbank), etc. For an investor, it represents an alternative rate of return, which is characterized by a virtual absence of risk and a high degree of liquidity. The risk-free rate is used as a starting point, to which the assessment of various types of risk that characterize investments in a given enterprise is tied, on the basis of which the required rate of return is built.

For cash flow for all invested capital, a discount rate is applied equal to the sum of the weighted rates of return on equity and borrowed funds (the rate of return on borrowed funds is the bank's interest rate on loans), where the weights are the shares of debt and equity in the capital structure. This discount rate is called the Weighted Average Cost of Capital (WACC). The weighted average cost of capital is calculated using the following formula:

(1.3)

Where r j is the cost of the j-source of capital, %;

d j is the share of the j-source of capital in overall structure capital.

At the same time, the cost of borrowed capital is determined taking into account tax effects:

Where r is the cost of borrowing capital (the interest rate on the loan);

t NP is the corporate income tax rate.

The cost of raising equity capital (preferred shares, common shares) is determined by their level of return to shareholders.

Stage 8. Calculation of the value in the post-forecast period.

Post-forecast valuation is based on the premise that the business is capable of generating revenue beyond the forecast period. With effective management of the enterprise, its life span tends to infinity. It is impractical to predict several tens or hundreds of years ahead, since the longer the forecast period, the lower the forecast accuracy. It is assumed that after the end of the forecast period, business income will stabilize and in the remaining period there will be stable long-term growth rates or infinite uniform income. To take into account the revenue that the business can bring outside the forecast period, the cost of the reversion is determined.

Reversion is income from the possible resale of property (enterprise) at the end of the forecast period or the value of property (enterprise) at the end of the forecast period.

Depending on the prospects for business development in the post-forecast period, one of the following methods of calculating its value at the end of the forecast period is selected:

1) By salvage value. It is applied only if in the post-forecast period the bankruptcy of the enterprise is expected, followed by the sale of existing assets. The costs associated with the liquidation and the discount for urgency in case of urgent liquidation are taken into account.

2) By the value of net assets. It can be used for a stable business, the main characteristic of which is significant tangible assets (capital-intensive production), or if the company's assets are expected to be sold at market value at the end of the forecast period.

3) The method of the proposed sale. Cash flow is converted to value using special ratios derived from analysis of historical comparables sales data. In the Russian market, due to the small amount of market data, the application of the method is problematic.

4) Gordon's model. The most commonly used model is based on a forecast of stable income in the residual period and assumes that depreciation and capital investments are equal if the company is expected to go bankrupt in the post-forecast period, followed by the sale of existing assets. Under the Gordon model, post-project annual income is capitalized into value using a capitalization ratio calculated as the difference between the discount rate and the long-term growth rate. In the absence of growth rates, the capitalization ratio will be equal to the discount rate. Calculations are carried out according to the formula:

where FV is the expected value in the post-forecast period;

СF n +1 - cash flow of income for the first year of the post-forecast (residual) period;

DR - discount rate;

g - long-term (conditionally constant) growth rates of monetary

flow in the residual period.

Conditions for applying the Gordon model:

1) income growth rates are stable;

2) capital investments in the post-forecast period are approximately equal to depreciation charges;

3) income growth rates do not exceed discount rates, otherwise the model estimate will give irrational results.

4) income growth rates are moderate, for example, do not exceed 3-5%, since high growth rates are impossible without additional capital investments, which this model does not take into account. In addition, permanent high rates of income growth for an indefinitely long period of time are hardly realistic.

Stage 9 Calculation of the current values ​​of future cash flows and value in the post-forecast period.

Current (present, discounted, present) value - the value of the company's cash flows and reversions, discounted at a certain discount rate to the valuation date. The fair value calculations are the multiplication of the cash flow (CF) by the corresponding period n unit fair value factor (DF), taking into account the selected discount rate (DR). The reversion cost is always discounted at the discount rate taken at the end of the forecast period, due to the fact that the residual value (regardless of the method of its calculation) is always the value at a specific date - the beginning of the post-forecast period, i.e. the end last year forecasting period.

When applying the discounted cash flow method in the assessment, it is necessary to sum up the current values ​​of the periodic cash flows that the object of assessment brings in the forecast period, and the current value of the business in the post-forecast period. Thus, the preliminary value of the business value consists of two components - the current value of cash flows during the forecast period and the current value of the value in the post-forecast period:

(1.6.)

10 stage. Introduction of final amendments

After determining the preliminary value of the enterprise, in order to obtain the final value of the market value, it is necessary to make final amendments. Among them, two stand out: an adjustment for the value of non-performing assets and a correction for the value of own working capital.

As a result of valuation of the enterprise by the discounted cash flow method, the value of the controlling liquid block of shares is obtained. If it is not the controlling stake that is being assessed, then allowance must be made for the lack of control rights.

The second method of the income approach is the METHOD OF CAPITALIZATION OF PROFIT (INCOME)- based on the basic premise that the value of a share of ownership in an enterprise is equal to the present value of the future income that this property will bring. From the position of Gryaznova A.G., Fedotova M.A. and others. The profit capitalization method is most suitable for situations in which it is expected that the enterprise will receive approximately the same amount of profit over a long period of time (or its growth rate will be constant). Compared to the DCF method, the income capitalization method is simpler, since it does not require the preparation of medium- and long-term income forecasts, but its application is limited to steep enterprises with relatively stable income, the sales market of which is well-established and is not expected to change significantly in the long term. Therefore, unlike real estate valuation, this method is rarely used in business valuation.

The income capitalization method is implemented by capitalizing the future normalized cash flow or capitalizing the future average profit:

The income (profit) capitalization method also consists of several stages:

Stage 1. Justification of the stability (relative stability) of income generation is based on the analysis of normalized financial statements. The main documents for analyzing the financial statements of an enterprise are the balance sheet and the statement of financial results and their use. For the purpose of evaluating an operating enterprise, it is desirable to have these documents for the last three years. Normalization of reporting - amendments to various extraordinary and one-time items of both the balance sheet and the statement of financial results and their use, which were not of a regular nature in the past activities of the enterprise and are unlikely to be repeated in the future.

Stage 2. Selection of the type of income to be capitalized. The capitalized income in business valuation can be revenue or indicators that take into account depreciation in one way or another: net profit after taxes, profit before taxes, cash flow. Profit capitalization is most suitable for situations in which it is expected that the company will receive approximately the same amount of profit over the long term.

Stage 3. Determining the amount of capitalized income (profit).

As the amount of income subject to capitalization, the following can be selected:

1) the amount of income predicted for one year after the date of assessment;

2) the average value of the selected type of income, calculated on the basis of retrospective (for example, for the last few reporting years 5-8 years) and, possibly, forecast data.

3) income of the last reporting year.

The size of the projected normalized income is determined using statistical formulas for calculating a simple average, a weighted average, or an extrapolation method.

Stage 4. Calculation of the capitalization rate.

The capitalization rate is a coefficient that converts the income of one year into the value of the object. The capitalization rate is characterized by the ratio of annual income and property value:

where R - capitalization rate;

I is the expected return for one year after the valuation date;

PV - cost.

The capitalization rate for an enterprise is usually derived from the discount rate by subtracting the expected average annual growth rate of earnings or cash flow (depending on which amount is capitalized). Accordingly, for the same enterprise, the capitalization rate is usually lower than the discount rate. If the income growth rate is assumed to be zero, the capitalization rate will be equal to the discount rate. So, in order to determine the capitalization rate, you must first calculate the appropriate discount rate using possible methods: capital asset valuation model; cumulative construction method or weighted average cost of capital model. With a known discount rate, the capitalization rate is determined in general terms by the following formula:

Where DR is the discount rate;

g - long-term growth rate of profit or cash flow.

Stage 5. Capitalization of income and determination of the preliminary value of the cost. The preliminary value of the cost is calculated by the formula:

(1.10.)

Step 6. Making adjustments for the presence of non-performing assets (if any) and for the controlling or non-controlling nature of the estimated interest and for lack of liquidity (if necessary). Adjustments for non-performing assets require an assessment of their market value in accordance with accepted methods for a particular type of asset (real estate, machinery and equipment, etc.).

Market (comparative) approach tobusiness valuation

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