Business appraisal before buying. Advice. How to buy a ready-made business correctly. How is the business value appraised?

More and more often, funds are invested in business for the purpose of subsequent resale / purchase or merger with other organizations for profit. And then the question arises: "How to assess the value of a business, taking into account all investments?"

Express assessment “on the knee”. If you have a simple business and need an appraisal of the cost, then count as follows: “profit for 1 - 2 years + property” and sell.

Types of cost

The first step is to deal with the types of business valuation. Different classifications give us different types of value, but I decided to stay with the basic ones. By the way, each of the types pursues its own goal and objectives for assessing the business, then you will understand why this is needed.

I also want to note that these types of valuation are related to operating businesses.

1. Market

Selling / buying price of a business under conditions of market competition.

The market value will be the price of all the property of the organization, taking into account the income that can be received in the future.

This business value is determined when it is necessary to find out where the organization is in the market for conducting M&A transactions (mergers or acquisitions), selling a business or adjusting long-term development.

Determination of market value when evaluating a business is based on in-depth analysis and cash flows.

Example (simple)

Let's analyze the market value of a business using the example of Romashka OJSC. The founder wants to adjust the development strategy. And for this, he creates a table like this:

We see that the price of the business for the year has grown by 320,000 rubles, which indicates a positive growth rate of Romashka, the business is going uphill.

2. Investment

Property value for specific investment purposes.

Calculated when business owners decide to launch investment projects. Or the organization is considered by investors for investment.

Depending on the projected investment income, the cost of this type can be either higher than the market or lower.

Example (simple)

OJSC "Romashka" is planning a strategic partnership with OJSC "Oblachko". The partnership is viewed as an investment project.

In this case, in order to evaluate the business, it is necessary to determine the investment value of the partnership, for this we will predict the benefits that we can get from the merger with another company.

The investment value of the business in the implementation of the partnership project in 5 years will amount to 11,756,723 rubles, which is beneficial for Romashka OJSC. This example with calculations is discussed in more detail below, in clause.

3. Recovery (current)

The sum of all costs of setting up and running a business, including assets.

It is necessary when the top management of the organization makes a decision on property insurance, also if the founders decide to revalue the assets. And more - when it is necessary to optimize the existing system taxation.

Example (simple)

The management of Romashka OJSC considers it necessary to insure the business against risks, while the business was opened 5 years ago. In this case, the assets are revalued for insurance and the replacement value of the business is determined.

During this time, fixed assets (equipment, real estate) fell significantly in value, which reflects the replacement value of the business.

The revaluation of equipment and real estate in 2018 led to a decrease in the value of the business, compared to 2013, by 700,000 rubles.

4. Liquidation

The value of the business in monetary terms minus all costs associated with its sale.

Such a cost estimate is needed when, due to unforeseen circumstances, it is necessary to close a business as soon as possible.

It is important to remember that with an emergency sale of a product, its value becomes lower than the market value, and with the implementation of a business, the same.

Example (simple)

OJSC "Romashka" closes due to high market. In this case, according to the latest reports, the price of the entire property is determined.

All debts to counterparties and partners, payments to employees, payment of commission to realtors for the sale of real estate, the cost of maintaining equipment in good condition until the moment of sale are deducted from the amount received.

Do not forget that even with liquidation, the organization can still make a profit.

The difference between the property value and the costs during the liquidation period for Romashka OJSC was RUB 5,500,000.

Approaches to cost estimation

There are three ways to evaluate a business. And according to Russian law, an appraiser (yes, that's right, you are not evaluating) is obliged to use all three approaches, and if one of them is not used, then justify in detail why.

1. Profitable

The profitable method of business valuation is based on the forecast of profit from the functioning of the business. Thus, the future earnings of the company are reduced to the present value.

In other words, the higher the projected income of the organization, the higher the current price of the business.

1.1 Direct capitalization method

Based on the revenues of the organization, adjusted for the projected growth rate of the business.

This method is suitable for organizations that plan to maintain or increase the rate of growth and profitability of the business, that is, for large, steadily developing companies. In this case, the evaluation formula is as follows:

Where “V” is the value of the business, “I” is the organization's income, “R” is the capitalization rate.

Income is calculated according to the data of the statement of financial results, reflected in the form No. 2 accounting statements... Most often, these data are taken over a period of 3-5 years and averaged.

If information on income can be found in the reporting, then the capitalization rate (R) must be calculated using the formula:

R = Discount Rate - Projected Average Growth Rate of Company Revenue

Example

The purpose of cost estimation is to improve management efficiency. Note: In 2017, the value of Romashka OJSC was estimated at 7,500,000, with income of 1,350,000 rubles.

Let's say OJSC “Romashka” in 2018 has incomes of 1,098,000 rubles. We divide this value by the capitalization rate and we get the value of the business, equal to 7,320,000 rubles.

So, after the current calculations, we see that the organization is losing ground, business growth rates are declining, and the efficiency of cash flow management has become less effective.

1.2 Method of discounting estimated cash flows

This method is based on the fact that the money and assets that the company has now are worth more than the same money and assets in the future.

The discounting method is used to estimate the cost big business influenced by various environmental factors, for example, the seasonality of income.

Cash flow Is the tide Money to the company.

Cash flows are discounted by multiplying cash flow by the discount factor according to the formula:

Discounted Cash Flow Formula

Where “DCF” is the discounted cash flow, “r” is the discount rate, “n” is the number of periods for calculating cash flows, “i” is the number of periods.

Example

The purpose of the valuation is to determine the effect of the merger of Romashka OJSC with Oblachko OJSC

Let's say OJSC “Romashka” enters into a partnership with revenues of 7,300,000 rubles. per year, and after 5 years of partnership seeks to receive income of 9,000,000 rubles, with an income rate of 10% per annum. How to determine if a given project is profitable?

Investment cost = (9,000,000) / (1 + 0.1) ^ 5 = 5,588,291.9 rubles.

By means of elementary calculations, it turns out that in 5 years OJSC "Romashka" will be able to receive the desired income by investing only 5 588 291.9 rubles. Therefore, the alliance of OJSC "Romashka" and OJSC "Oblachko" is profitable.

2. Comparative

In this method of assessing the value of a business, the assessed organization is compared with similar companies. Similar companies should be similar in economic, material, technical and other conditions.

After the selection of analogous companies, suitable multipliers are calculated for them, that is, the ratio of the selling price and the economic indicator.

Business value at comparative method scores are calculated by multiplying the obtained multipliers by the key financial indicators of the evaluated organization.

2.1 Method of transactions (method of sales)

This method is based on the analysis of market prices for the purchase or sale of controlling or one hundred percent stakes in organizations similar to the business being valued.

After calculating and applying the multipliers, the resulting business value is brought to the weighted average. When using the transaction method, the following formula is used:

Business value (capitalization) = Indicator * Multiplier

Example

The purpose of the appraisal is to sell the business. Therefore, it is necessary to evaluate 100% of all issued shares of Romashka OJSC.

We will take the initial data from the financial statements: revenue = 730,000 rubles, asset value = 410,000 rubles.

Having studied the market and the external environment, we have chosen three analogous companies. Since these are public companies, their reporting is open to external users, so you can easily display multipliers of interest to us.

The table below shows the data of peer companies, calculated multiples and indicators of Romashka OJSC.

To determine the exact value of the multipliers, it is necessary to display the weighted values ​​of the multipliers (we have 9.30 and 14.20).

• By multiplier P \ R - 6 789 000 rubles;
• By multiplier P \ R - 5,822,000 rubles.

However, the total cost of the business should be one, therefore, further it is necessary to weigh the received values.

If we set the weight to the multiplier P \ R - 0.8, and to the multiplier P \ A - 0.2, then using elementary calculations we get the total value of the business of OJSC “Romashka” equal to 6,595,600 rubles.

The method does not require further adjustment for the degree of control, since the prices for controlling stakes in peer companies were used as the initial information.

2.2. Capital market method

This method is based on the analysis of prices for shares of peers that are available on the market in public circulation.

In this case, experts use multipliers, where the numerator is the share price, and the denominator is a financial indicator, for example, revenue or profit.

This method uses adjustments to financial performance on a per share basis, such as earnings per share. Otherwise, this method is identical to the trades method:

Business value = Revenue * (Price per share) / (Revenue per share)

Example

The purpose of the appraisal is the sale of Romashka OJSC. Given that the company over the past few years received an annual profit of 100,000 rubles.

The price-per-share / earnings-per-share ratio (adjusted per share) for similar peer companies is 7. How to find out how much Romashka is worth?

Cost of OJSC “Romashka” = (annual profit) x (multiplier “price per share / earnings per share”)

100,000 x 7 = 700,000 rubles.

2.3 Industry ratio method

This method is based on the use of pre-calculated and analyzed relationships between the selling price of a business in a particular industry and its financial performance.

For example, marketing agencies can be sold for 0.9 annual revenue, consulting agencies for 0.7 annual revenue.

In Russia, the method of sectoral coefficients has not yet become widespread, since there is no in-depth analysis of sectoral indicators from statistical and specialized services.

Example

The purpose of the assessment is to adjust the business development strategy. To do this, calculate the annual revenue, which is equal to 6,500,000 rubles.

OJSC "Romashka" operates in the field wholesale flowers. According to market analysis, it is possible to derive an industry coefficient equal to 1.8.

So, having a business value of 11,700,000 rubles. with a revenue of 6,500,000 rubles, the management of OJSC “Romashka” may decide to expand the network.

3. Costly

The cost valuation method defines the value of a business as the price of the company's existing assets. To apply this approach, the appraiser must have reliable information on the costs of acquiring and maintaining assets.

3.1 The method of net assets in business valuation

This method is based on asset analysis. The first step is to evaluate intangible assets. Next comes the analysis of inventory items, stocks. A detailed assessment of non-monetary assets (accounts receivable) is then made.

The method of net assets is quite simple in calculations, the value of a business is determined by the formula:

Example

The purpose of the assessment is to reveal the cost of Romashka OJSC for business insurance against credit risks.

It is necessary to determine the amount of assets and debts of OJSC “Romashka”. So, all assets are determined at 4,573,100 rubles, and debt obligations at 2,546,900 rubles. Thus, the cost of OJSC "Romashka" is estimated at 7,120,000 rubles.

As a result of the assessment, it was determined that OJSC “Romashka” can be insured for 7,120,000 rubles.

3.2 Residual value method

It is used when it is already known for sure that the business will be liquidated, and the owners need to determine the value of the business for quick implementation. Calculation formula:

Business value = Market value of assets - debt

Since the company is being liquidated, we calculate the proceeds from the sale of equipment, supplies and materials, adjusted for a quick sale.

Thus, the market value of the assets of OJSC “Romashka” is determined at 5,213,100 rubles. At the same time, the cost of maintaining and servicing equipment and stocks until the moment of sale will amount to 543,000 rubles.

Recently, the organization has formed significant debts to creditors, which amount to 1,876,000.

Also, at closing, it is necessary to pay all severance payments to employees, which in total amount to 665,200 rubles. The profit for the liquidation period will be 4,871,100 rubles.

As a result, the value of OJSC “Romashka” by the liquidation value method is determined at 7,000,000 rubles.

Conclusions on methods

After detailed consideration of all approaches to business valuation, it is advisable to structure the information obtained, and to deduce the advantages and disadvantages of each method.

Method note

So, after the calculations are made by three methods, it is necessary to identify the final result. By the way, the costs should be approximately the same.

The data differ mainly because one particular approach is more relevant to the purpose of the assessment than others, or more fully takes into account the current situation. The agreement is made according to the formula:

Total cost = Profitable × K1 + Comparative × K2 + Expended × K3

“K1”, “K2”, “K3” - weighting factors selected depending on the significance of a particular cost in the final assessment. The odds must add up to one.

Example

Consider the already familiar Romashka OJSC. Calculation data in the table below.

Explanation of the coefficients: the evaluator believes that the comparative is the most significant in this case, therefore, it is assigned the maximum weight.

So, having calculated according to the formula, the final agreed cost of the business is determined at 6,924,200 rubles.

Step-by-step instruction

In this chapter, I will cover the main steps in business valuation. Naturally, every business has its own nuances, it is important to remember this.

1. Determination of the goal

The first step is to determine for what purpose the business is being evaluated. This step is important for the realization of the economic interests of the parties who have come to a decision to evaluate the business. And most often the assessment is carried out in the following cases:

1. Improve the management efficiency of the organization;
2. Justify the decision to launch an investment project;
3. Buy or sell a business, or its share;
4. Restructuring the enterprise;
5. Develop a long-term development strategy;
6. Assess the financial performance of the organization;
7. Make a decision on the issue and sale of securities.

2. Choosing an appraisal company

This is a very important step. In many countries, business valuation is carried out by independent professionals who adhere to established industry standards in their work.

A good tool that can help in choosing an appraiser is the ratings of trusted agencies, such as:

1. Expert Rating Agency;
2. Publishing house Kommersant.

The main criteria when choosing an appraiser can be the term of work in the market, professionalism and reputation, the presence of a list of well-known partners who have already used the services of the firm, positive

At the present stage of development of the business market and the world economy, the assessment of intangible assets and intellectual property has become no less important than tangible ones. The role of objective analysis and accurate determination of business value has increased. This procedure is simply necessary for those who are planning to invest, buy or sell businesses. Independent evaluation the value of the company in such situations becomes important tool management, which will make it possible to make the right choice, avoid many risks and get the maximum profit. It will not even be able to fully function and expand without a qualitative assessment at one of the stages of development.

What is business valuation?

Business valuation is a procedure for determining the market value of an enterprise (taking into account tangible, intangible assets, financial condition, expected profit), which is carried out by the authorities or experts. Any property in combination with a package of rights to it can become an object of assessment. The meaning of the term "business valuation" is slightly different. It implies the definition in the monetary ratio of the value of the enterprise, which includes (except for assets) its utility and the costs committed to obtain it.

The main purpose of the appraisal is to establish the market value of the assets being appraised for the client. The customer initiates a business assessment, as a rule, in the case of the sale or purchase of a company, equity interest, lending, project financing, improving the efficiency of enterprise management, etc. Situations often arise when several reasons combine.

When do you need a business valuation?

An increase in the value of a business is one of the important indicators of the growth of its profitability; a decrease indicates the need for changes in the management system and development strategy. Both the business owner and a third party may be interested in conducting an objective assessment.

The cost of an enterprise is determined when:

• assessment of management efficiency;
• corporatization;
• reorganization;
• the use of mortgage lending;
• taxation in inheritance, donation;
• participation in the activities of the stock market;
• assessment of the allocated business shares in case of a merger in the form of consolidation and expansion;
• partial or complete liquidation;
• issue of new shares, etc.

A business assessment may be needed not only by a potential investor or business owner, but also by other market participants, for example, insurance companies (to determine the amount of risk, confirm compliance with the risk sharing agreement between the client and the policyholder), credit institutions (to assess solvency, determine the optimal amount of maximum credit), as well as government agencies, shareholders, suppliers, manufacturers, intermediaries. The end result of the assessment can be presented in one report in several sections or in two different documents. The assessment of the enterprise is carried out in accordance with the set goal, which is formulated by the customer when drawing up the Contract and the Assignment for the assessment. They must necessarily comply with the Federal Law "On appraisal activities in Russian Federation", The provisions of the" National Code of Ethics for Appraisers of the Russian Federation "and Federal standards estimates.

Business valuation methods

Before investing or purchasing a business, the buyer first of all evaluates its usefulness for himself. It must match his individual income needs. It is the latter indicator, taking into account the costs, that is the basis of the market value that the appraiser calculates. The principles, methods and approaches to its definition are chosen based on the specifics of the business as a "product": investment (money is invested in it, expecting a profit in the future), consistency (it can be sold as a system or separate elements), need (depends on the situation inside production and in the external environment). The appraisal process consists of several stages performed by a specialist appraiser to objectively determine the value of the business:

• conclusion of an appraisal agreement with the customer;
• determination of the characteristics of the object of assessment;
• market analysis;
• selection of assessment methods, calculations;
• generalization of the results obtained within each of the approaches, determination of the final value of the object's value;
• preparation and transmission of a report to the customer.

At the fourth stage, the appraiser chooses one or more optimal approaches to assessing the enterprise, which will be most effective in a particular situation. Business valuation methods are universal, but they are selected individually in each situation.

Costly

This approach implies a set of methods for assessing the value of an object, which are aimed at determining the costs required to restore, replace the enterprise, taking into account costs, equipment wear and other factors. It allows you to track absolute changes in the balance sheet with its possible adjustment as of the valuation date (according to an independent expert appraiser) - data on current market prices for labor force, materials and other costs.

Profitable

Income approach means a set of methods for assessing the value of an object, which are based on determining the amount of expected income from the business. In this case, the key factor that determines the value of the object is income. The larger it is, the higher its market value. Here, experts apply the estimated principle of expectation, taking into account the period of receipt of potential income according to the plan, the number and degree of risks. For the analysis, capitalization ratios are used, which are calculated based on market data. This method of assessment is considered the most effective and convenient for determining the value of a business (only in some cases comparative or costly are more accurate). The approach is best used if the company's revenues are stable.

Comparative

A comparative method for determining the value of an enterprise means a complex of valuation methods that are based on comparing the object of valuation with competing objects (with the similarity of characteristics, the availability of information about the prices of transactions). Experts believe that it is he who gives the most accurate results (of course, subject to the active work of the market with similar properties in terms of parameters). For this approach, market data for similar objects and the method of capital market, transactions and industry ratios (with elements - benchmarking analysis) are used.

Important: it is worth noting that each approach makes it possible to emphasize and objectively analyze certain characteristics of the object of assessment, but they are all interrelated.

How to evaluate the value of a business?

The appraisal of business and other objects is carried out by specialized companies. To assess the value of the enterprise, you need to contact the specialists, clearly indicate the purpose of determining the value and sign the Agreement. According to the Decree of the Government of the Russian Federation of December 2007 No. 60, the assessment process should take place in several stages:

1. Definition of the object (description, rights to it, date and base of assessment, limiting conditions).
2. Conclusion of an assessment agreement (identification and preliminary inspection of an object, selection of the type, sources of the necessary data, personnel selection, development of an assessment plan, preparation and conclusion of an agreement, payment for services).
3. Determination of the characteristics of the object (collection and verification of data, determination of external and internal information).
4. Market analysis (includes analysis of financial ratios, reports, adjustments to financial statements for valuation purposes).
5. Selection of methods within the framework of a specific approach (or several), carrying out the necessary calculations.
6. Generalization of the results, determination of the final cost of the object.
7. Drawing up and transferring the report to the customer.

Choosing an appraisal company

The appraisal company is the organizer of the appraisal project, helps the appraiser in his professional activities, provides marketing, financial and informational support. It provides services not only to business owners, but also to legal entities, financial institutions(most often to banks), insurance companies and government agencies. As a rule, the property owner pays for the appraisal services, but often the other party puts forward certain requirements regarding the appraisal company. When choosing an appraisal company, it is necessary to collect as much objective information about it as possible and make sure of its competence and professionalism. Particular attention should be paid to the following factors:

• term of work in the market;
• customer reviews;
• business reputation;
• position in the ratings of independent specialized agencies and publications (but it is important to pay attention to the rating criteria, it should be formed from generalized indicators; you can use the data, for example, from the banki.ru resource, which reflect the degree of customer satisfaction with the services of different banks, and see which rating they cooperate with companies);
• documents (Certificate of state registration legal entity, copies or scans of constituent documents, etc.);
• awards, certificates, diplomas;
• the amount of liability insurance (the higher it is, the safer for the customer).

The appraisal company must prove itself to be an organization that produces correct results and offers the services of objective experts, not motivated by a third party.

Submission of the necessary papers

To start the assessment process, the business owner must provide a package of documents. Its position depends on the purpose of the conduct, the form of ownership and the criteria for the formation of the assessment. Many appraisal companies have launched websites where you can apply online or by phone (but you only need to submit documents in person). The basic package includes the following papers:

1. Registration Certificate or Articles of Association.
2. For joint stock companies- reports on the results of the issue of securities, an extract from the register of shareholders.
3. Documents displaying organizational structure and the activities of the facility.
4. Financial statements for the last 3-5 years, sometimes an additional explanation is needed on some balance sheet items.
5. Copies of patents, licenses.
6. If necessary - documents confirming the ownership of real estate.

Advice: It is important to take into account that each appraisal company has its own methodology of work. Sometimes, in addition to the basic set of documents, additional documents are required from the customer, for example, a development plan for the next few years, drawing up an investment project, an auditor's opinion, an explanatory note from the owner describing the company and indicating the number of staff.

Valuation Model Harmonization

The dynamic economic situation in the country and the world becomes the reason that for each assessment it is necessary to develop an individual model. The study of the same object is rarely repeated, but in this case it is impossible to reproduce the same assessment. The evaluators use generally accepted models as a base. Their choice must be coordinated with the client based on the goals and tasks of the project. The optimal model should take into account not only the financial aspect, but also help in assessing the level corporate governance, have the potential and act as an independent method of assessing the value of a business.

Basic business valuation models:

1. Economic value added (Economic value added- EVA).
2. Market value added (MVA).
3. Added value equity capital(Shareholder value added - SVA).
4. Total shareholder return (TSR).
5. Added cash flow (Сash value added - CVA).

Getting a report with the results

Business valuation - example

A business valuation report can be submitted both in text format and in the form of tables or with their active use. For example, consider the valuation of an enterprise using the net asset value method (cost approach). It is most often used if the company has significant tangible assets (or very few of them), the percentage of total costs in the cost of the product or service is insignificant, in recent years the cash flow has been subject to significant fluctuations and if the company does not have fully depreciated assets that are currently generate income.

Let's consider an example based on the table:

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Business appraisal is necessary not only for conducting sale and purchase transactions, calculating the collateral value, but also for other purposes, for example, to determine the effectiveness of management. In the course of completing the assigned task, the expert takes into account, in addition to the costs of setting up an enterprise, market factors that can affect the cost, and also uses technological, organizational and financial analyzes... Valuation activity is an essential part of any developed country, because the results of valuation become the basis for making important economic and managerial decisions in the private and public sector.

In contact with

The market for selling ready-made businesses in Russia is growing from year to year. More and more people want to invest money, even small ones, in a real business, to try themselves in the role of an entrepreneur. And often the acquisition of an already operating company is the best option for achieving these goals. But only if you approach the issue thoughtfully and thoroughly.

The slightest resistance from the seller in providing information is a danger signal!

When buying a ready-made business, regardless of its specifics, you can use the following algorithm of actions.

Begin entrepreneurial activity(as well as expanding an existing one) can be done in two ways: create new business or buy ready-made. After evaluating the pros and cons of the second option, you can decide whether it is the right one, or whether it is better to use the first option.

Pros of a ready-made business:

• The history of development, good or bad, that makes it possible to evaluate it.
• Availability of premises and equipment.
• Staffed staff.
• Well-established connections and distribution channels.
• A finished product (service), sometimes a well-known brand.
• A certain demand for goods (services), the ability to predict its change.
• Detailed financial and accounting reports.

Cons of a ready-made business:

• Equipment can be worn out and manufacturing processes can be outdated.
• The lease may not be renewed.
• The staff may be low-skilled
• Counterparties may be unreliable, relations with them could be damaged by the previous owner.
• Subsequently, debt obligations (unpaid taxes, penalties and customs duties or guarantees) may "emerge".

STEP 2. Choose the type of business to buy

To do this, you need to answer several questions:

1. Is there any kind of activity and business that you dreamed of?

2. What type of business best suits your past knowledge, skills and experience?

3. What do you want to do: manufacturing, wholesale, retail or service provision?

4. Are you interested in import-export business?

4. Do you want to involve your family to work in the ready-made business?

Experts recommend that you first make a choice between production, retail, wholesale and services, then solve the import-export issue, and then - determine a specific product (service) or market within the selected sector.

STEP 3. Decide on the funds

The first step is to decide how much own funds you can allocate for the transaction. Then decide how much money you can and are willing to borrow (for example, from a bank).

Note: possibility of attracting borrowed money to acquire a business depends on the availability of liquid fixed assets and real estate. If you buy a business that owns such assets, then in most cases you can borrow 50% of the total value of the business or investment project. Your personal assets can also serve as collateral for a loan to buy a new business.

STEP 4. Choose the options that are suitable for the cost

Entrepreneurs wishing to sell their business place advertisements in free classified newspapers or in the in-line classifieds section of local periodicals, in any business publication or newsletter, on specialized Internet sites. Another source of offers is broker companies specializing in the sale of ready-made businesses.

Note: sellers do not always "publicly" announce the sale of their business. The reason is the need to maintain the strictest confidentiality, as the announcement of the sale can cause excitement among customers, employees and suppliers. And many potential sellers choose to use their personal networks to find buyers.

Therefore, it is also necessary to make inquiries among friends, acquaintances, entrepreneurs, lawyers, bank employees, accountants, consultants and colleagues. You can also interview suppliers or distributors in the business you are interested in.

STEP 5. Find out the reasons for the sale of the selected companies

The previous owner may have several of them:

• Changing of the living place. Lack of direct control and management of the process.
• Disagreements between owners. No joint agreement reached on the routes further development companies.
• Loss of interest in business. After 6-8 years, the activity may simply stop being satisfying.
• Illness, reaching the venerable age. Limited opportunities of the owner to manage the business, and there are no worthy successors to the case.
• The need for investment in another project. The owner found a more profitable and less burdensome line of business.
• Sale of non-core assets. Some areas of activity of large enterprises or holdings are less profitable or do not fit into the overall development concept.

Basically, all reasons can be grouped as follows:

• this business has ceased to bring sufficient profit (the industry is experiencing a recession and decline in business activity; the company is under the threat of bankruptcy; weak management; the company is involved in criminal scams, etc.);
• the owner is going to start some other business or diversify his activities; intends to retire for personal reasons; he does not have enough funds to develop the company.

It is clear that the purchase of a company is advisable only when the owner of the company is guided by considerations included in the second group.

In principle, at this stage, out of all the previously selected options, two or three suitable ones remain.

In the conditions of the Russian market, it is still impossible to assess the value of a company based on the market value of its shares, since only shares of large enterprises are quoted on the open stock market. Therefore, when evaluating small and medium-sized businesses, experts recommend using the following approaches: profitable, market and cost.

Income approach

With this approach, the value of the company is determined by the amount of expected income. This method assumes that the buyer will not pay more for the business than the present value of future income for the period of interest. Applying this approach, the buyer calculates various options for business development. However, with this approach, the level of risk is often defined too subjectively. This valuation method is good if the company's income is positive and sustainable.

Market approach

Business value is estimated by comparing recent sales of companies of comparable size. The main condition for applying this approach is a mature market. The value of the evaluated company (V1) is defined as the product of the ratio of the market price of the analogous company (V2) and its base indicator (R2) by the base indicator (R1) of the evaluated company: V1 = V2 / R2 × R1. The basic indicators are usually: net profit, balance sheet value of the enterprise. When choosing the compared companies, they are guided by the following requirements: the industry of enterprises must match, the quantitative and qualitative characteristics of the company must be approximately equal.

Cost approach

The value of a business is determined by the sum of the costs of resources for its reproduction or replacement, taking into account physical and moral deterioration. This approach is most effective when the buyer is looking to compare the costs of acquiring a business with the costs of setting up a similar business.

There is no definite answer as to which assessment method to use. In each case, the approaches are combined depending on the specifics of the business.

Note: at this point, it makes sense to turn to independent consultants, business brokers or professional appraisers. They often play a vital role. After all, determining the value of a business is a process that requires professional knowledge and experience in various fields of law, mathematical analysis, economics, accounting and audit.

At this stage, as a rule, one suitable option remains.

STEP 7. Study the selected business in detail

If the funds allow (and the game is worth the candle!), It is best, again, to turn to professionals and order Legal Due Diligence (“due diligence”) - a comprehensive check of the seller for “due diligence”. At a minimum, it will clarify the accuracy of the legal and financial information provided, check the correctness of the documents and their compliance with the current legislation. As a maximum, due diligence includes legal and financial audit of accounting and tax accounting, assessment of the compliance of top managers with their positions, inventory of property, etc. to infinity.

If there are not very many doubts, and the transaction amount is not so large, you can try to do the above procedure yourself: ask as many questions as possible, demand reporting, inquire about the numbers and models of equipment and the dates of their purchase, make inquiries about business reputation, find out about all the obligations of the acquired company, etc.

Note: the slightest resistance of the seller in providing the information you are interested in is a danger signal!

Other important areas of concern include:

1. Shortened rigid time frames for selling the business.

2. Missing key information on the object.

3. Obtaining even existing information is difficult.

4. No clear reason for the sale or justification of the reason for the sale is not credible.

5. It was found that at least part of the information about the object was misinterpreted or misinterpreted by the seller.

STEP 8. Minimize Potential Risks

1. Inquire about anything that could potentially harm your business.

2. Find out the state of the property complex and the specifics of its location. This will prevent problems, for example, in connection with the termination of the lease.

3. It is necessary to rely on facts and, if possible, not to take a word, no matter how trustworthy the seller may be. This is especially true of the volume of profits and turnover of the company declared by the seller.

4. Offer to conclude a guarantee on the absence of debts that do not go through the accounting department. It is signed by all the founders and the CEO. The buyer's legal protection is that after signing warranty obligation they are personally responsible for any borrowings made by the company during the past three years. In case of occurrence negative consequences the buyer has the opportunity to send creditors to their real debtor, or, if the case comes to court, to file a recourse claim to protect their rights.

5. Lawyers also recommend drawing up detailed plan transfer of management powers. This is especially important to maintain relationships with customers, suppliers, other business partners, and employees of the target business. After all, it is important for the buyer to keep a viable business.

6. In the contract with the seller, it is necessary to indicate that the new owner acquires only those debts related to the activities of the enterprise, which are indicated in the contract. And the debts associated with the previous activities of the enterprise are not transferred to the new owner. The contract and its annexes must contain a detailed list of all debts included in the enterprise, indicating creditors, the nature, size and timing of their claims.

STEP 9. Begin purchase negotiations

If all your doubts are resolved in positive side, make a formal proposal and proceed to negotiations.

Note: sellers prefer not to deal with frivolous buyers, so do not be surprised if you are asked to post a deposit, similar to how it is done during real estate transactions.

As a rule, in negotiations, both parties start with the maximum and minimum proposals and gradually soften their terms. Therefore, you must determine in advance the price and terms on which you agree to purchase the business. Naturally, start with more favorable terms for yourself. Be prepared for the seller to meet your first offer with conditions you deem unfair. This is an inevitable part of bargaining. If your intentions are serious, work towards the terms you agree to accept.

STEP 10. Get a business!

reference

Ready-made business sale market: 2006 results

(www.1nz.ru/readarticle.php?article_id=1278)

The most popular and offered, as usual, are cafes and small restaurants in the price range of $ 50-150 thousand; hairdressing salons, beauty salons ($ 25-50 thousand); car services ($ 100-250 thousand).

Among travel agencies, offers of $ 10-20 thousand prevail, for which the demand is usually very insignificant. Decent offers can be considered travel companies that have not only a travel agency, but also a tour operator license, have their own representatives abroad and agreements with hotels and hotels. But the price of such a company will already be from $ 30 thousand and more.

Certain preferences have emerged in the acquisition of a business related to the provision of intangible services: consulting, audit companies, educational institutions... Investors are ready to invest in such companies that have existed for more than 5-7 years and have all the necessary licenses and permits, up to $ 150 thousand. Such types of businesses as modeling and concert agencies began to be offered. There were more offers for the sale of advertising and advertising production companies.

There is an oversupply in the field of medicine and pharmacology medical centers and dental clinics and, on the contrary, the demand for pharmacies and pharmacy kiosks exceeds supply.

V retail there is a significant excess of supply over demand. This is typical for small shops and pavilions in shopping centers costing $ 30-180 thousand.

Among manufacturing enterprises factories for the production of bricks, blocks, tiles are popular. The buyer can pay up to $ 1 million for such a business, but he must be sure that all old connections and consumers will remain. At the same time, the demand for this type of business, such as the production of PVC windows and doors, is decreasing. There are proposals for food production (sausage, confectionery shops) worth $ 400-700 thousand, but the demand for them is small.

What methods (methods) are used to assess the value of a business? How does a business assessment work by example and what goals are pursued? What documents are needed to assess the business of an enterprise?

Hello everyone who visited our resource! In touch Denis Kuderin - an expert and one of the authors of the popular magazine "HeatherBober".

In today's post we will talk about what a business valuation is and why it is needed. The material will be of interest to present and future entrepreneurs, directors and managers of commercial companies and all those who are close to business and financial topics.

Those who read the article to the end will receive a guaranteed bonus - an overview of the best Russian companies specializing in business valuation, plus advice on choosing a reliable and competent appraiser.

1. What is a business valuation and when may it be needed?

Any business - whether it is a plastic cup business or an automobile industry - strives to develop and expand its sphere of influence. However, it is impossible to correctly assess your prospects without a comprehensive analysis of the current state of affairs.

It is the business assessment that gives the owners and managers of existing commercial enterprises the real picture of the company's assets and its potential.

When does a business need an appraisal:

• sale of the entire enterprise or its shares in the form of shares;
• lease of an operating business;
• development of new investment directions with the aim of expanding and developing the company;
• revaluation of funds;
• reorganization of the company - merger, separation of individual objects into independent structures;
• liquidation of a company as a result of bankruptcy or termination of activities;
• issue or sale of shares;
• optimization of production and economic activities;
• changing the format of the company;
• change of leadership;
• transfer of assets as collateral;
• transfer of shares of the enterprise to the authorized capital of a large holding;
• insurance company.

As you can see, there are many situations in which a business needs a professional assessment. But the main goal of such a procedure is always the same - a competent analysis of the financial efficiency of an enterprise as a means of making a profit.

When initiating business appraisal activities, stakeholders want to know what income is or will be generated in the future by a particular commercial structure. Sometimes the task of assessment is even more specific - to answer the questions: to develop or sell a company, liquidate it or try to reorganize, whether to attract new investors?

The value of a business is an indicator of its success and effectiveness. The market price of a company consists of its assets and liabilities, the value of personnel, competitive advantages, profitability indicators for the entire period of existence or a specific time period.

Small business owners and individual entrepreneurs the question may arise - is it possible to evaluate the company independently? Alas, the answer is no. The business category is complex and multifaceted. You can get a rough estimate, but it is unlikely to be objective.

And one more important nuance - the data obtained independently does not have an official status. They cannot be considered as full-fledged arguments and will not be accepted, for example, in court or as.

2. What are the goals pursued by business valuation - 5 main goals

So, let's consider the main tasks that are solved during the business assessment procedure.

Goal 1. Improving the efficiency of enterprise management

Effective and competent enterprise management is an indispensable condition for success. The financial status of the company is characterized by indicators of stability, profitability and sustainability.

This assessment is needed mainly for internal use. The procedure identifies surplus assets that slow down production and underestimated industries that can generate profits in the future. It is clear that the former should be eliminated, the latter should be developed.

Example

During the business assessment in a trading company, it turned out that the use of rented warehouses for storing products is 20-25% cheaper than servicing and maintaining their own premises on the balance sheet.

The firm decides to sell its warehouses and henceforth use only rented space. Cost savings and optimization of production processes are evident.

Goal 2. Purchase and sale of shares in the stock market

The company's management decides to sell its shares on the stock market. To make an economically viable decision, you need to evaluate the property and correctly calculate the share that is invested in securities.

Selling shares is the main way of doing business. You can sell a company in whole and in parts. Obviously, the cost of a controlling stake will always be higher than the price of individual shares.

At the same time, the valuation is important for both shareholders and buyers. It is also desirable that the appraiser not only name the market price of the package, but also analyze the prospects for the development of the business as a whole.

Goal 3. Making an investment decision

Such an assessment is carried out by order of a specific investor who wants to invest his funds in an operating enterprise. Investment value is the potential ability of the invested funds to generate income.

The appraiser finds out the most objective market value of the project from the point of view of the investment perspective. It takes into account, for example, the prospects for the development of the industry in a particular region, directions financial flows in this area, the general economic situation in the country.

More information - in the article "".

Goal 4. Enterprise restructuring

The main goal of the owner ordering an appraisal during the restructuring of the company is to choose the most optimal approach to the processes of changing the structure of the company.

Restructuring is usually carried out with the aim of improving the efficiency of the business. There are several types of restructuring - mergers, acquisitions, separation of independent elements. Evaluation helps to carry out these procedures with minimal financial costs.

With the complete liquidation of the object, the assessment is needed mainly for making decisions on the return of debts and the sale of property at free tenders.

In the process of restructuring is often required to carry out, the current assets and liabilities of the company, complete.

Goal 5. Development of an enterprise development plan

Development of a development strategy is impossible without assessing the current status of the company. Knowing the real value of assets, the level of profitability and the current balance, you will rely on objective information when drawing up a business plan.

In the table, the assessment goals and features are presented in a visual form:

№	Assessment objectives	Peculiarities
1	Improving management efficiency	Results are applied for internal use
2	Purchase and sale of shares	Valuation is important for both sellers and buyers
3	Making an investment decision	The object is assessed in terms of investment attractiveness
4	Business restructuring	Evaluation allows you to change the structure, taking into account maximum efficiency
5	Development plan development	Evaluation allows you to draw up a competent business plan

Method 3. Estimated by industry peers

It uses data on the purchase or sale of enterprises similar in profile and volume of production. The method is logical and understandable, but it is necessary to take into account the specifics of the evaluated company and specific economic realities.

The main advantage of this method is that the evaluator is guided by factual data, rather than abstraction, and takes into account the objective situation in the sales market.

There are also disadvantages - the comparative approach does not always affect the prospects for business development and uses averaged indicators of industry peers.

Method 4. Cash Flow Forecast Valuation

The assessment is carried out taking into account the long-term prospects of the company. Specialists need to find out what profit a particular business will bring in the future, whether the investment in the company is profitable, when the investment will pay off, in what directions the money will move.

4. How to assess the value of an enterprise's business - step-by-step instructions for beginners

So, we have already found out that only professionals can competently evaluate a business. Now let's take a look at the specific steps that business owners need to take.

Step 1. Choosing an appraisal company

The choice of an appraiser is a responsible and important stage of the procedure. The final result depends entirely on it.

Professionals are distinguished by the following features:

• solid experience in the market;
• use of up-to-date technologies and techniques, modern software;
• availability of a functional and convenient Internet resource;
• a list of well-known partners who have already used the services of the company.

The specialists themselves who will conduct the assessment must have permits and professional liability insurance.

Step 2. We provide the necessary documentation

The appraisal firm will certainly explain to you in detail what documents are required to be provided, but if you put together the package in advance, it will save time and immediately set the appraiser on the business wave.

Clients will need:

• company title documents;
• company charter;
• registration certificate;
• list of real estate, property, securities;
• accounting and tax reports;
• list of subsidiaries, if any;
• certificates of debt on loans (if there are debts).

The package is supplemented depending on the goals and characteristics of the procedure.

Step 3. We agree on a business valuation model with the contractor

Usually, the customer knows for what purpose he is conducting the assessment, but not always in the know which method is better to apply. During the preliminary conversation, the expert and the client jointly develop an action plan, determine the methods of assessment and agree on the timing of its implementation.

Step 4. We are waiting for the results of the industry market research by experts

To begin with, appraisers need to analyze the situation in the industry segment of the market, find out the current prices, trends and development prospects of the area under study.

Step 5. We monitor the analysis of business risks

Risk analysis - necessary stage business valuation. The information obtained in the course of such an analysis is necessarily used in the preparation of the report.

Step 6. We control the determination of the development potential of the enterprise

Professional appraisers always take into account the prospects for business development, but it is desirable for clients to control this stage of the study and be aware of the results obtained. It is always good to know what potential your business has.

Step 7. We receive a report on the work done

The final stage of the procedure is the preparation of the final report. Ready document breaks down into separate positions and contains not only bare numbers, but also analytical conclusions. The report, certified by signatures and seals, has official force in resolving property disputes and in court proceedings.

How to conduct an assessment as competently and safely as possible for your company? Best option- involve independent lawyers at all stages as consultants. This can be done using the services of the website Pravoved. The specialists of this portal work remotely and are available around the clock.

Most of the consultations on the site are free. However, if you need more in-depth assistance, services are paid for, but the fee is set by the customer.

5. Professional assistance in business appraisal - overview of TOP-3 appraisal companies

Don't have the time, desire or opportunity to look for an appraiser on your own? No problem - take advantage of our expert review. The three best Russian appraisers include the most reliable, competent and proven companies. Read, compare, choose.

It does not matter for what purpose you carry out the assessment - purchase and sale, secured loans, management improvement, reorganization - KSP Group specialists will carry out the procedure professionally, promptly and in accordance with all the rules.

The company has been on the market for over 20 years, has about 1000 regular customers, is well versed in the realities of Russian business, advises customers free of charge. Among the firm's permanent partners are well-known companies, small and medium-sized businesses.

The organization has membership in the Self-Regulatory Organization of the ROO (Russian Society of Appraisers) and liability insurance for 5 million rubles.

The company was founded in 2002. The company guarantees prompt work (business appraisal period is 5 days) and offers reasonable prices (40,000 for the standard appraisal procedure). In its methods, the organization adheres to the principles of "Ethical Business" - transparency, honesty, openness, compliance with the terms of the contract, responsibility.

The staff of "Yurdis" - 20 professional appraisers, members of the largest Russian SRO. Each of the specialists has liability insurance in the amount of 10 million rubles, diplomas and certificates confirming high qualifications. Among the well-known clients of the company are Gazprombank, Sberbank, Svyazbank, the Center for the Organization of the Military Mortgage.

3) Atlas Grade

The company has been doing business in the appraisal market since 2001. He works with tangible and intangible assets, develops and predicts ideal schemes for increasing income, cooperates with enterprises in all regions of the Russian Federation.

The list of advantages includes the reference accuracy of estimates, competent legal design of reports, a clear understanding of the goals and objectives of customers. The firm is accredited in commercial and state banks of the Russian Federation, uses an expanded methodological base in its work, applies its own technological and scientific developments.

And a few more tips on choosing the right appraiser.

Reputable companies have a well-designed and flawlessly functioning website. Through the Internet resource of such companies, you can get free consultations, order services, talk with managers and support representatives.

Conversely, one-day firms may not have a network portal at all, or they may be designed as a cheap one-page site. No additional information, analytical articles, interactive functions.

Tip 2. Refuse to cooperate with broad-based companies

Organizations that position themselves as universal firms do not always have the appropriate level of competence.

Estimating the fair value of a stock or its intrinsic value is not an easy task, but it is useful for any investor to know how to do this in order to determine the appropriateness of the investment. Financial multipliers such as Debt / Equity, P / E and others make it possible to estimate the total value of shares in comparison with other companies on the market.

But what if you need to determine the absolute value of the company? Financial modeling will help you to solve this problem, and, in particular, the popular Discounted Cash Flow (DCF) model.

Be warned: this article can take a long time to read and comprehend. If you now have only 2-3 minutes of free time, then this will not be enough. In this case, just transfer the link to your favorites and read the material later.

Free Cash Flow (FCF) is used to calculate economic efficiency investments, therefore, in the decision-making process, investors and lenders focus on this indicator. The amount of free cash flow determines what amount of dividend payments will be received by the holders of securities, whether the company will be able to timely fulfill its debt obligations, direct money to buy back shares.

The company may have positive net income, but negative cash flow, which undermines the efficiency of the business, that is, in fact, the company does not make money. Thus, FCF is often more useful and informative than the company's net income.

The DCF model just helps to estimate the current value of a project, company or asset based on the principle that this value is based on the ability to generate cash flows. To do this, the cash flow is discounted, that is, the size of future cash flows is brought to their fair value in the present using a discount rate, which is nothing more than the required profitability or the price of capital.

It is worth noting that the assessment can be made both in terms of the value of the entire firm, taking into account both equity and debt capital, and taking into account the value of only equity capital. In the first case, the firm's cash flow (FCFF) is used, and in the second, the cash flow to equity (FCFE). In financial modeling, in particular in the DCF model, FCFF is most often used, namely UFCF (Unlevered Free Cash Flow) or the company's free cash flow before deducting financial liabilities.

In this regard, we will take the indicator WACC (Weighted Average Cost of Capital) Is the weighted average cost of capital. The WACC of a company takes into account both the value of the company's share capital and the value of its debt obligations. We will analyze how to assess these two indicators, as well as their share in the company's capital structure, in the practical part.

It should also be borne in mind that the discount rate can change over time. However, for the purposes of our analysis, we will take a constant WACC.

To calculate the fair value of shares, we will apply the two-period DCF model, which includes interim cash flows in the forecast period and cash flows in the terminal period, in which it is assumed that the company has reached constant growth rates. In the second case, it is calculated terminal value of the company (Terminal Value, TV). This indicator is very important, since it represents a significant proportion of the total value of the company being assessed, as we will see later.

So, we have covered the basic concepts associated with the DCF model. Let's move on to the practical part.

The following steps are required to obtain a DCF estimate:

1. Calculation of the present value of the company.

2. Calculation of the discount rate.

3. Forecasting FCF (UFCF) and discounting.

4. Calculation of terminal value (TV).

5. Calculation of the fair value of the enterprise (EV).

6. Calculating the fair value of a share.

7. Building a sensitivity table and checking the results.

For our analysis, we will take the Russian public company Severstal, the financial statements of which are presented in dollars according to the IFRS standard.

To calculate free cash flow, you will need three reports: a profit and loss statement, a balance sheet and a cash flow statement. For the analysis, we will use a five-year time horizon.

Calculation of the present value of the company

Enterprise Value (EV) Is, in fact, the sum of the market value of capital (market capitalization), non-controlling interest (Minority interest, Non-controlling Interest) and the market value of the company's debt, minus any cash and cash equivalents.

The market capitalization of a company is calculated by multiplying the share price (Price) by the number of shares outstanding (Shares outstanding). Net Debt (Net Debt) is total debt (namely, financial debt: long-term debt, debt payable during the year, financial lease) minus cash and cash equivalents.

As a result, we got the following:

For the convenience of presentation, we will highlight the hards, that is, the data we enter, in blue, and the formulas in black. We look for data on non-controlling interests, debt and cash in the balance sheet.

Discount rate calculation

The next step is to calculate the WACC discount rate.

Let's consider the formation of elements for the WACC.

Share of equity and debt capital

Calculating your equity share is pretty straightforward. The formula looks like this: Market Cap / (Market Cap + Total Debt). According to our calculations, it turned out that the share of the share capital was 85.7%. Thus, the share of borrowed money is 100% -85.7% = 14.3%.

Share capital cost

The Capital Asset Pricing Model (CAPM) will be used to calculate the required return on equity investment.

Cost of Equity (CAPM): Rf + Beta * (Rm - Rf) + Country premium = Rf + Beta * ERP + Country premium

Let's start with a risk-free rate. As it was taken the rate on 5-year US government bonds.

Equity risk premium (ERP) can be calculated by yourself if there are expectations for the profitability of the Russian market. But we will take data from ERP Duff & Phelps, a leading independent financial consulting and investment banking firm that has been used by many analysts to estimate. Essentially, ERP is the risk premium received by the stock investor, not a risk-free asset. ERP is 5%.

The beta used was the industry beta for emerging capital markets Aswat Damodaran, renowned professor of finance at the Stern School Business at New York University. So the leverageless beta is 0.90.

To take into account the specifics of the analyzed company, it is worth adjusting the industry beta coefficient by the value financial leverage... For this we use Hamada's formula:

So the leverage beta is 1.02.

We calculate the cost of equity capital: Cost of Equity = 2.7% + 1.02 * 5% + 2.88% = 10.8%.

The cost of borrowed capital

There are several ways to calculate the cost of borrowed capital. The surest way is to take every loan the company has (including issued bonds) and add up the yield to maturity of each bond and the interest on the loan, weighing the shares of the total debt.

In our example, we will not delve into the structure of Severstal's debt, but will follow a simple path: take the amount of interest payments and divide it by the total debt of the company. We get that the cost of borrowed capital is Interest Expenses / Total Debt = 151/2093 = 7.2%

Then the weighted average cost of capital, that is, WACC, is 10.1%, while we take the tax rate equal to the tax payment for 2017 divided by pre-tax profit (EBT) - 23.2%.

Cash flow forecasting

The free cash flow formula is as follows:

UFCF = EBIT (Earnings before interest and taxes) -Taxes (Taxes) + Depreciation & Amortization (Depreciation) - Capital Expenditures (Capital expenditures) +/- Change in non-cash working capital (Change in working capital)

We will act in stages. First, we need to forecast revenue, for which there are several approaches, which broadly fall into two main categories: growth-based and driver-based.

The growth rate forecast is simpler and makes sense for a stable and more mature business. It is built on the assumption of the company's sustainable development in the future. For many DCF models this will be sufficient.

The second method involves forecasting all the financial indicators required to calculate free cash flow, such as price, volume, market share, number of customers, external factors, and others. This method is more detailed and complex, but also more correct. Regression analysis often becomes part of this forecast to determine the relationship between underlying drivers and revenue growth.

Severstal is a mature business, so for the purposes of our analysis, we will simplify the task and choose the first method. Moreover, the second approach is individual. For each company, you need to choose its key factors influencing the financial results, so it will not work to formalize it under one standard.

Let's calculate the growth rate of revenue since 2010, gross profit margin and EBITDA. Next, we take the average over these values.

We forecast revenue based on the fact that it will change at an average rate (1.4%). By the way, according to the Reuters forecast, in 2018 and 2019 the company's revenue will decline by 1% and 2%, respectively, and only then positive growth rates are expected. Thus, our model has slightly more optimistic forecasts.

We will calculate EBITDA and gross profit based on average margins. We get the following:

In calculating FCF, we need EBIT, which is calculated as:

EBIT = EBITDA - Depreciation & Amortization

We already have an EBITDA forecast, it remains to forecast depreciation. The average depreciation / revenue ratio over the last 7 years was 5.7%, based on which we find the expected depreciation. Finally, calculate EBIT.

Tax we count on the basis of pre-tax profit: Taxes = Tax Rate * EBT = Tax Rate * (EBIT - Interest Expense)... We will take interest expenses constant in the forecast period, at the level of 2017 ($ 151 million) - this is a simplification that is not always worth resorting to, since the debt profile of issuers is different.

We have already indicated the tax rate. Let's calculate taxes:

Capital expenditures or CapEx is found in the cash flow statement. We forecast based on the average share of revenue.

Meanwhile, Severstal has already confirmed its capex plan for 2018-2019 at more than $ 800 million and $ 700 million, respectively, which is higher than the volume of investments in recent years due to the construction of a blast furnace and coke oven battery. In 2018 and 2019, we will take CapEx equal to these values. So the FCF can be under pressure. The management is considering the possibility of paying more than 100% of free cash flow, which will smooth out the negative from the growth of capex for shareholders.

Change in working capital(Net working capital, NWC) is calculated using the following formula:

Change NWC = Change (Inventory + Accounts Receivable + Prepaid Expenses + Other Current Assets - Accounts Payable - Accrued Expenses - Other Current Liabilities)

In other words, an increase in inventory and accounts receivable reduces cash flow, while an increase in accounts payable, on the contrary, increases.

You need to do a historical analysis of assets and liabilities. When we calculate the values ​​for working capital, we take either revenue or cost. Therefore, first we need to fix our Revenue and Cost of Goods Sold (COGS).

We calculate what percentage of revenue falls on Accounts Receivable, Inventory, Prepaid expenses and Other current assets, since these indicators form revenue. For example, when we sell stocks, they decrease and this affects revenue.

Now let's move on to operating liabilities: Accounts Payable, Accrued Expenses, and Other current liabilities. At the same time, we tie the accounts payable and accumulated liabilities to the cost price.

We forecast operating assets and liabilities based on the average figures that we obtained.

Next, we calculate the change in operating assets and operating liabilities in the historical and forecast periods. Based on this, using the formula presented above, we calculate the change in working capital.

We calculate the UFCF using the formula.

Fair value of the company

Next, we need to determine the value of the company in the forecast period, that is, to discount the received cash flows. Excel has a simple function for this: NPV. Our present value was $ 4,052.7 million.

Now let's determine the terminal value of the company, that is, its value in the post-forecast period. As we have already noted, it is a very important part of the analysis, as it accounts for more than 50% of the fair value of the enterprise. There are two main ways to assess terminal value. Either the Gordon model or the multiplier method is used. We will take the second method using EV / EBITDA (last year's EBITDA), which is 6.3x for Severstal.

We use a multiplier to the EBITDA parameter last year of the forecast period and discounted, that is, we divide by (1 + WACC) ^ 5. The terminal value of the company was $ 8,578.5 million (more than 60% of the company's fair value).

Total, since the value of the enterprise is calculated by summing the cost in the forecast period and the terminal value, we get that our company should cost $ 12,631 million ($ 4,052.7 + $ 8,578.5).

Removing net debt and non-controlling interests, we get a fair share capital value of $ 11,566 million. Dividing by the number of shares, we get a fair share value of $ 13.8. That is, according to the constructed model, the price of Severstal securities is currently overstated by 13%.

However, we know that our value will change depending on the discount rate and EV / EBITDA multiple. It is useful to build sensitivity tables, and see how the value of the company will change depending on the decrease or increase in these parameters.

Based on these data, we see that with an increase in the multiplier and a decrease in the cost of capital, the potential drawdown becomes smaller. Still, according to our model, Severstal shares do not look attractive to buy at current levels. However, it should be borne in mind that we built a simplified model and did not take into account growth drivers, for example, growth in product prices, dividend yield significantly exceeding the market average, external factors, and so on. This model is well suited for presenting the general picture according to the company's assessment.

So, let's take a look at the pros and cons of the discounted cash flow model.

The main advantages of the model are:

Gives a detailed analysis of the company

Does not require comparison with other companies in the industry

Defines the "inner" side of the business, which is associated with cash flows that are important to the investor

Flexible model, allows you to build predictive scenarios and analyze sensitivity to changes in parameters

Among the disadvantages are:

A large number of assumptions and forecasts are required on value judgments

Quite difficult to construct and estimate parameters, for example, discount rates

A high level of detail in the calculations can lead to overconfidence of the investor and potential loss of profits.

Thus, the discounted cash flow model, although quite complex and based on value judgments and forecasts, is still extremely useful for the investor. It helps to dive deeper into the business, understand various details and aspects of the company's activities, and can also give an idea of ​​the company's intrinsic value based on how much cash flow it can generate in the future, and therefore bring profit to investors.

If the question arises of where this or that investment house got its long-term target (target) for the price of any share, then the DCF model is just one of the elements of business assessment. Analysts do roughly the same work that is described in this article, but most often with even deeper analysis and assigning different weights to individual key factors for the issuer in the framework of financial modeling.

In this material, we have only described an illustrative example of an approach to determining the fundamental value of an asset using one of the popular models. In reality, it is necessary to take into account not only the company's DCF valuation, but also a number of other corporate events, assessing the degree of their impact on the future value of securities.