At the stage of formation of the sales market in Russia ready-made business The comparative method of evaluating companies, as a rule, was not used, since it was difficult to find information on sales of similar enterprises. However, the experience accumulated over recent years allows us to accumulate the necessary data on company sales and develop approaches to assessing value that can be successfully used as professional appraisers, so financial directors enterprises.
Approaches to evaluating an existing business
A comparative approach to assessing the value of an existing business is a set of methods based on comparison of the company being valued with similar enterprises for which information is available on the financial terms of sale.
- Personal experience
Olga Kanenkova, Chief Accountant OJSC "Avto-framos"/RENAULT (Moscow)
The need to assess the value of our company arose when it was necessary to carry out an additional issue of shares. The problem that we encountered was the lack of analogous enterprises, without which it is quite difficult to reliably estimate the market value of the company.
The results of assessing the value of a company can vary significantly depending on how the company being valued is planned to be used in the future. Obviously, the value of a small confectionery company whose building new owner plans to build a printing house, will differ from the value of the same company if a modern confectionery production is created on its basis.
During the assessment of operating and income-generating companies, the following types cost:
- investment value of business - determined based on the profitability of the business for a specific investor for given investment goals;
- price existing business under existing use - calculated on the basis of data on the profitability demonstrated by the enterprise at the time of sale;
- market price - the most likely price at which the company can be sold at open market in a competitive environment, when the parties to a transaction act reasonably, having all the necessary information, and the value of the transaction price is not affected by any extraordinary circumstances. A reliable result of assessing the market value of an enterprise can be obtained by using a comparative approach to assessing an existing business.
- Personal experience
Olga Makarovskaya,assessment specialist at Marka Audit (Moscow)
The comparative approach most realistically reflects the price that may arise on the market during the purchase and sale process, since the calculation uses the prevailing market prices for similar enterprises. A serious disadvantage of this approach is that the calculations are based on the past financial results of peer companies and do not take into account the development prospects of the enterprise.
Boris Moshkovich, CEO ABM Partner company (Moscow)
Enterprises can independently apply the comparative approach only to obtain approximate information about the value of the company. Data can be obtained both from the Internet and from printed publications, for example, the Reform newsletter, which contains official information on sales at auctions and competitions, on trading in shares of the largest Russian enterprises. Using a comparative approach is especially effective when there is an active sales market for comparable companies. A more serious valuation for any share transactions should be carried out by independent professional appraisers.
Assessment methods within the comparative approach
Within the comparative approach, most valuation experts identify three main methods: the peer company method, the sales method and the industry ratio method.
Peer company method
When using the analogue company method, the value of a ready-made business is assessed based on information about the value of analogous enterprises whose shares are quoted on the market. Before you begin selecting analogue companies, it is necessary to analyze the specifics of the work and the market occupied by the company being evaluated.
Analogue enterprises must belong to the same industry as the company being valued, and also be similar in the following main financial and production characteristics:
- company size (revenue, headcount, asset value, etc.);
- range;
- commodity and territorial diversification;
- technological and technical equipment;
- risks associated with work;
- comparability of the proposed transaction (form of transaction, financing terms, payment terms, etc.).
According to Olga Makarovskaya, analogue companies selected for company valuation comparative method, must not only carry out one type of activity with the company being valued, but also must have been sold not so long ago in relation to the time of sale of the company. At the same time, peer companies should not be involved in the acquisition process, since this distorts their real price.
If there are discrepancies between peer companies and the company being evaluated according to any of the listed criteria, it is necessary to use the appropriate multipliers (coefficients characterizing the relationship of the resulting indicator to one of its components).
The following types of multipliers are widely used:
- company value/profit;
- company value/ cash flow;
- company value/market value of tangible assets.
Depending on what information is available about peer companies, other multipliers may be used.
When calculating the value of a company, it is recommended to use several multipliers, having previously calculated the degree of reliability (weight) for each. The reliability of a particular multiplier is determined by expert method. When using several multipliers, the formula for calculating the value of a company will look like this:
Company value = (K i × M i × B i),
where n is the number of performance indicators used to assess the value of the company;
K i is the performance indicator of the enterprise being assessed;
M i - multiplier for the i-th indicator;
B i is the weight of the i-th multiplier.
The practical application of this formula will be discussed below.
Sales method
As primary information for calculating the value of a ready-made business using the sales method, data on the acquisition price of blocks of shares in analogous companies is also used. The main difference between this method and the previous one is that when it is applied, it is permissible to use information about the prices of shares of similar enterprises in any transactions. The peer company method involves using data on transactions with controlling stakes in similar companies.
Industry coefficient method
The method is based on the use of industry multipliers calculated in the course of studies of sales statistics of industry enterprises conducted by specialized agencies 2. It is necessary that the study be conducted for at least half of all enterprises in the industry comparable in size to the one being assessed.
Application of the methodology to assessing the value of small and medium-sized enterprises
In Russia, information on the value of sold companies, especially small and medium-sized enterprises owned by private investors, is usually closed. From the Internet and other media you can obtain data on the value of those companies whose owners have announced the sale. As practice shows, business owners tend to overestimate their companies and the price of offers is often inflated by two to three times. However, there are situations when a business is undervalued. The reasons for serious discrepancies in estimates may be the lack of information about the state of the market, the need to sell the business as soon as possible, etc. The research conducted by the authors of the article allows us to estimate the value of the company using a comparative method in the shortest possible time.
The main purpose of the study is to calculate the values of multipliers that can be used in determining the value of companies. The study analyzed the performance indicators of 170 sold medium and small companies operating on leased premises (most companies classified as small and medium-sized businesses do not have their own production facilities).
Enterprises that can be called typical were selected for the study. The analyzed array did not include companies with unique tangible and intangible assets that significantly increase the value of the business. Also, the so-called “urgent sales”, the price of which was underestimated, were not considered.
The resulting list of companies was divided into three large groups depending on the term of the lease agreement: up to 12 months, from 12 to 36 months, over 36 months. This division is due to the fact that the value of the company varies significantly depending on the period of validity of the concluded lease agreement.
In the selected groups, correlation coefficients were calculated to determine the relationship between the company’s value and the main pricing factors, such as the value of the company’s assets, revenue, cash flow, etc.
- Reference
The correlation coefficient is an indicator characterizing the degree of dependence of two quantities. This is a dimensionless quantity whose value lies between –1 and +1. If, with an increase in one value, an increase in another is observed, then we speak of a positive correlation; if the opposite happens, then the correlation coefficient is negative. How stronger dependence between the studied quantities, the closer the correlation coefficient is to 1 (–1). If there is no relationship between the indicators, then the correlation coefficient will be zero.
The highest value of the correlation coefficient (from 0.94 to 0.98) was obtained for the dependence of business value on the company’s net profit. There is also a strong correlation for the dependence of the company’s price on the size of tangible assets (0.83–0.99) and the size of revenue (0.69–0.76). The corresponding multipliers were identified:
- price/net profit;
- price/market value of tangible assets;
- price/revenue.
For each of the groups, the values of the multipliers and their weight were calculated.
Research results depending on the rental period of space
Lease agreement concluded for a period of up to 12 months. This is one of the most common lease terms in the practice of Russian small and medium-sized businesses. This is explained by the fact that, in accordance with Russian legislation rent over one year is subject to state registration, That's why long term Lease agreements create additional problems for businesses. Sometimes landlords themselves are not inclined to rent out space for a long term, because they want to have the so-called “freedom of maneuver”. However, the benefits of an annual lease disappear if the business needs to be sold, as investors place higher demands on the return on investment of such companies. Therefore, the cost of a company with a lease agreement of up to one year is significantly less than the cost of a similar company with a lease agreement for a period of one to three years.
Lease agreement for a period of one to three years. Compared to companies with short-term leases, businesses with leases ranging from one to three years are more attractive to potential buyers. Despite the fact that companies occupying premises on the basis of short-term agreements often demonstrate good dynamics of key indicators, outperforming companies that prefer long-term relationships with the landlord in all respects, the latter can be sold much faster and for a higher price. Owners who have definitely decided to sell a business can be advised to enter into a long-term lease agreement before starting the search for a buyer. At the same time, registration costs will be recouped many times over when the business is sold.
The multiplier values calculated during the study for the first two groups, as well as their weight, are given in Table. 1.
Table 1. Multipliers for valuing companies. working in rented space
Lease agreement for a period of more than three years. Based on sales experience on Russian market we can say that specific gravity enterprises with lease agreements with a lease term of more than three years do not exceed 12% of the total number of sold companies.
The list of sold companies occupying premises on a long-term basis is very heterogeneous. The most representative data is available only for restaurants and small retail chains. Multipliers calculated based on the results of the study for companies with long-term lease agreements are presented in table. 2.
Table 2. Multipliers for valuing companies operating on long-term lease terms
The owners of such companies tend to inflate the price, which makes them difficult to sell: although buyers (investors) are generally positive about businesses that have long-term leases, they are not willing to pay much more for them.
Practical application of the research results
In November 2003, a cost assessment was carried out large company, selling wholesale food products and low-alcohol drinks. The company operated on rented premises, having warehouses in Moscow, Ulyanovsk, Samara and Yaroslavl. The remaining lease terms for various divisions ranged from one and a half to three years. At the same time, the company had the opportunity to purchase the premises, but chose not to do so. The reason for the assessment was that a competing company approached the owners with a proposal to merge (buy a business).
The company was characterized by the following main indicators: revenue for 2003 - 600 million rubles, net profit of the company - 42.5 million rubles, value of tangible business assets - 1.5 million rubles.
To calculate the value of companies, the peer company method described above was used. The multipliers used in the calculations were taken from Table. 1 for companies whose lease agreement is concluded for a period of one to three years.
Business cost = 73.31 million rubles.(600 million rubles × 0.26 × 0.28 + 42.5 million rubles × 1.67 × 0.39 + 1.5 million rubles × 3.94 × 0.33).
As a result, the transaction amount for the sale of the company amounted to 67 million rubles, while the initial offer was 50 million rubles.
Let us estimate the value of the same company for lease terms of up to one year and over three years in order to identify the impact of the lease term on the value of the company. If the lease agreement were concluded for a period of up to a year, the cost of the company would be RUB 50.32 million, and for a period over three years - RUB 88.69 million
Prospects for using the comparative approach
Although the multipliers obtained in the course of the study are not constant and change along with the market conditions for ready-made businesses, in our opinion, they will remain relevant throughout 2004.
Today, the most significant characteristics of the market are the reduction of investor requirements for the payback period of projects (economic stability reduces the risks of investing in the purchase of existing companies) and the growing interest of potential buyers in manufacturing companies containing real assets. Based on this, we can assume that in 2005 the values of all multipliers will increase, as well as the share of the factor of the cost of tangible assets.
The main advantage of the comparative approach to valuation compared to other methods is that it takes into account market conditions and the real priorities of investors. Of course, we cannot say that the value of the business, determined by the comparative method, coincides with the final amount of the transaction. The final terms are always determined during negotiations between the owner of the enterprise and the potential investor. Moreover, every business is unique. At the same time, in our experience, the deviation of the valuation results carried out using multipliers from the price obtained during a professional calculation of the company’s value does not exceed 10%. This allows us to consider the valuation results obtained by the comparative method as an important guideline when selling companies.
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1 In accordance with the Decree of the Government of the Russian Federation dated 07/06/01 No. 519 “On approval of valuation standards”, when conducting a business valuation, an appraiser is obliged to use (or justify the refusal to use) cost, comparative and income approaches to valuation. – Note editors.
2 There are no such agencies in Russia now. In the United States, the Federal Tax Service, along with commercial agencies, calculates industry multipliers. – Note editors.
Valuation of an enterprise based on a comparative approach involves using actual market prices for similar enterprises (shares) as a reference point.
An investor, investing in a business, uses the principle of alternative investments, i.e. strive to obtain the maximum return on the invested capital, at the same level of risk.
In similar enterprises, the relationship between price and the most important financial parameters, such as profit, cash flow, dividend payments, sales volume, book value of assets, is largely the same.
The comparative approach includes, depending on the purpose, object and specific conditions of assessment, three main methods: the company-analogue method, the transaction method and the method of industry coefficients.
The analogue company method involves using the actual price as a basis for comparison, purchase and sale prevailing in the stock market. The method is used to evaluate non-controlling interests.
The transaction method is based on the use of the purchase and sale price of both a controlling stake and the enterprise as a whole. The scope of application of this method is the assessment of an enterprise or a controlling stake.
The industry coefficients method involves the use of special formulas, price indicators and information on company sales. Scope of application - a limited range of industries and specific business having a narrow range of production of goods and provision of services.
Market attractiveness method - to determine the indicator of market attractiveness of an enterprise, you need to divide the total profit for the last financial year by the number of shares in circulation, and then the market price of the share is divided by the income per share, and then the resulting ratio is used.
The essence of the comparative approach in determining the value of an enterprise is as follows. An enterprise similar to the one being valued that was recently sold is selected. The relationship between the sales price and any financial indicator for a similar enterprise is calculated. This ratio is called the multiplier. Multiply the multiplier value by the same base financial indicator of the company being valued, we obtain its value.
However, despite its apparent simplicity, this method requires highly qualified and professional appraisers, because involves making fairly complex adjustments to ensure maximum comparability of the company being valued with its peers. In addition, the appraiser must determine priority comparability criteria based on specific conditions, assessment purposes, and quality of information.
The main advantage of the comparative approach is that the assessment is based on market-based pricing information. Those. The appraiser guides the buyer to the actual purchase and sale prices, which integrally take into account the market situation.
Another advantage is the reflection of real supply and demand for a given investment object, the possibility of choice allows the investor to invest capital in a business that provides the optimal ratio between the price of the investment object, projected income and risk level.
However, the comparative approach has a number of significant disadvantages. Firstly, the basis for calculating multipliers is retrospective data - financial indicators achieved in the past. Those. The method does not take into account the company's future capabilities. Secondly, in order to determine the degree of similarity of the companies being compared with the one being valued, as well as to calculate all multipliers, the appraiser must have comprehensive financial information. Obtaining additional information on a special issue from peer companies is sufficient complex process. Thirdly, since absolutely similar enterprises practically do not exist, to ensure the necessary comparability it is necessary to make complex adjustments, calculations and make some amendments that require serious justification.
The comparative approach includes the following main stages of assessment:
1. Gathering the necessary information.
2. Compiling a list of similar enterprises.
3. Financial analysis.
4. Calculation of multipliers.
5. Selecting the multiplier value.
6. Determination of the final cost.
7. Making final adjustments.
Let's consider the content of each stage of the assessment.
Gathering the necessary information.
The comparative approach uses two types of information:
1. Market (price) information.
2. Financial information.
Compiling a list of similar enterprises
The process of selecting comparable companies is carried out in several stages. At the first stage, the so-called circle of analogue companies is determined. It includes the maximum possible number of enterprises that have the prevailing sales price on the market. The comparability criteria at this stage are quite loose. This is primarily the similarity of the industry, the products (services) produced, the volume of production, the ratio of equity and borrowed funds. Comparability is determined on the basis of information published in the press.
At the second stage, a list of “candidates” is compiled. Because the analyst needs Additional Information in addition to what is published in the press, he must collect it directly from the enterprises. Therefore, the initial list may be shortened due to the refusal of some companies to provide the necessary information, as well as due to poor quality and unreliability of the information provided.
At the third stage, a final list of analogue companies is compiled. The inclusion of enterprises in this list is based on a thorough analysis of additional information received. At this stage, the analyst tightens the criteria for comparability. The level of production diversification, market position, nature of competition, and geopolitical situation are considered. The appraiser studies the dynamics of production volumes, profits, and dividend payments.
The composition of the comparability criteria is determined by the assessment conditions, the availability of the necessary information, techniques and methods developed by the appraiser. Depending on the specific case, you can focus on the professionalism of the management team, financial and production strategy, phase economic development, credit status, etc.
The financial analysis when applying a comparative approach to valuing an enterprise, it uses all traditional techniques and methods financial analysis. The analyst calculates financial ratios, analyzes balance sheets, etc. profit and loss reports. Financial analysis is the most important technique for determining the comparability of similar companies with the one being evaluated. The distinctive features of financial analysis with a comparative approach are manifested in the following: firstly, financial analysis allows you to determine the position (rank) of the company being evaluated in the list of analogues: secondly, financial analysis allows you to justify the degree of confidence in a specific type of multiplier in the total number of them. This ultimately determines the weight of each cost option when deriving the final value; thirdly, financial analysis is the basis for making the necessary adjustments to ensure both increased comparability and the validity of the final cost.
Calculation of multipliers
A comparative approach to business valuation involves the use of four main groups of multipliers:
Group 1 - price/profit, price/cash flow;
Group 2 - price/dividend payments;
Group 3 - foam/sales revenue, price/physical volume of production;
Group 4 - price/book value of assets.
Selecting the multiplier value
This stage is the most difficult and requires particularly careful justification, subsequently recorded in the report. Since there are no identical companies, the range of values of the same multiplier for similar companies can be quite wide. The analyst cuts off extreme values and calculates the average value of the multiplier for a group of analogues. Best result gives a weighted average, since the bulk of such enterprises can be concentrated in the minimum (maximum) area of the range. Then financial analysis is carried out, and the analyst, to select the value of a specific multiplier, uses financial ratios and indicators that are most closely related to this multiplier. By size financial ratio the position (rank) of the company being assessed in general list. The results obtained are superimposed on the multiplier series and a value is determined quite accurately that can be used to calculate the value of the company being valued.
Determining the final cost
The comparative approach allows the analyst to use the maximum number of all possible multiplier options; therefore, during the calculation process, the same number of cost options will be obtained; if the analyst offers a simple average of all obtained values as the final value, this will mean that he trusts all multipliers equally. The most correct method for determining the final value is the weighing method. The appraiser, depending on the specific conditions, goals and object of assessment, the degree of confidence in this or that information, gives each multiplier its own weight; based on weighing, the final value is obtained, which can be taken as the basis for subsequent adjustments.
Making final adjustments
The final value obtained as a result of applying multipliers should be adjusted depending on specific circumstances, the most typical adjustments being the following. A portfolio discount is provided if there is an unattractive nature of production diversification for the buyer. When determining the final cost, the analyst must take into account the existing non-production assets. If the process of financial analysis reveals either the insufficiency of its own working capital, or an emergency need for capital investment, the resulting value must be subtracted. It is possible to apply a discount when assessing a controlling stake for low liquidity. In some cases, an adjustment is made in the form of a premium for the controls provided to the investor.
Justification of selected approaches and methods in business assessment
Estimating the value of an enterprise using several approaches outlines the boundaries of a reasonable market value, while the graduate is not obliged to use all available approaches, but can limit himself to only those that are most appropriate to the situation. The main thing is to competently justify the choice of approaches used.
Cost-effective approach. Net Asset Value Method
The cost approach is based on the analysis and restructuring of the enterprise's balance sheet.
The net asset value method allows you to evaluate an enterprise taking into account the costs of its creation, provided that the enterprise remains operational.
The book value of assets, based on the balance sheet provided by the enterprise, does not reflect their market value. Accordingly, it must be amended by making a preliminary assessment of the reasonable market value of each asset separately, and determining how much the carrying amount of liabilities corresponds to their market value.
The net asset value method is based on the market value of the business's real assets, but does not reflect the future earnings of the business.
Comparative approach
The transaction method, or sales method, is focused on the acquisition prices of the enterprise as a whole, or a controlling stake. This determines the most optimal scope of application of this method for valuing an enterprise or a controlling stake.
The transaction method is the only method that takes into account the market situation and allows one to estimate the market value of an enterprise's capital by comparing the company being valued with comparable ones whose capital sales prices are known.
The peer company method, or the capital market method, is based on the use of prices formed by open stock market. Thus, the basis for comparison is the price per unit share joint stock companies open type. Therefore, in pure form This method is used to value a minority stake.
In this diploma work a comparative approach to determine the market value of the business of Ekspertiza LLC was not used, since there is not a sufficient number of offers on the market for the sale of similar objects that have the same organizational and legal form of activity as the object of assessment. The information that is available in the RFBR bulletin "Reform" and on Internet sites is presented mainly on open joint-stock companies; shares of similar enterprises are not for sale.
Income approach. Discounted Cash Flow Method
The ability of a business to generate income is considered an important indicator in assessing the ownership rights of a company. Hence, one of the main approaches to assessing a business is profitability.
The income approach allows you to determine the market value of an enterprise depending on expected future income.
The amount of future income reduced to the current value serves as a guide to how much a potential investor is willing to pay for the company being valued.
The main indicator in the income approach is net cash flow. The latter is calculated as the difference between inflow and outflow Money for a certain time.
To determine the market value of capital of Ekspertiza LLC, the following approaches and methods were used in business valuation:
Cost approach, within which the net asset value method is applied;
Income approach, within which the discounted cash flow method is applied.
General characteristics of the comparative approach,theoretical foundations of the comparative approach; typesinformation used in the comparative method.Basic methods of the comparative approach: company method -analogues – capital market method, transaction method, industry coefficients method.Basic principles for selecting analogue enterprises.Characteristics of price multipliers.Formation of the final cost value.
Feature of the comparative approach to the valuation of property is the orientation of the final value, on the one hand, to the market prices for the purchase and sale of shares owned by similar companies; on the other hand, on the actually achieved financial results. This chapter focuses on:
The theoretical basis of the comparative approach, the scope of its application, the features of specific methods.
Criteria for selecting similar enterprises.
Characteristics of the most important price multipliers.
The main stages of formation of the final value of the cost.
Selecting multiplier values, weighing intermediate results, making amendments.
The comparative approach is one of three approaches used in valuation practice. The appraiser uses actual market prices for similar enterprises (shares) as a guideline. The most important condition for applying the comparative approach is the presence of a developed stock market, as well as the availability and reliability of market information. The comparative approach is based on the principle of alternative investments. An investor investing in stocks buys, first of all, future income. The production, technological and other features of a particular business are of interest to the investor only from the perspective of the prospects for generating income. The desire to obtain the maximum return on invested capital with an adequate level of risk and free placement of investments ensures the equalization of market prices. The price of an enterprise reflects its production and financial capabilities, market position, and development prospects. Consequently, in similar enterprises the relationship between price and the most important financial parameters, such as profit, dividend payments, sales volume, and book value of equity capital, must be the same. A distinctive feature of these financial parameters is their decisive role in generating the income received by the investor.
Advantages of the comparative approach :
If there is sufficient information about analogues, accurate results are obtained;
The approach reflects the market, taking into account the real relationship between supply and demand for such objects, since it is based on a comparison of the company being valued with analogues that have already been recently purchased or whose shares are freely traded on financial markets;
The price of an enterprise reflects the results of its production and economic activities.
Disadvantages of the comparative approach :
Based only on retrospective information, practically does not take into account the development prospects of the enterprise;
It is difficult, and sometimes impossible, to collect financial information about analogues (due to the insufficient development of the stock market, many joint-stock companies do not give their quotes to the stock market, and closed joint-stock companies, of which there are a lot, do not disclose financial information);
It is necessary to make significant adjustments due to the strong differences between enterprises (equipment, assortment, development strategies, quality of management, etc. differ).
Comparative approach depending on the goals, object of assessment and sources of information includes three methods :
Analogue company method (capital market method). → The cost base is the price multiplier.;
Cost at the level of non-controlling interest → Transaction method;
Cost at the level of (non-) and controlling interest → Industry coefficient method
1. The cost is at the level of a non-controlling interest. Capital market method (equivalent company method)
2. based on the real prices of shares of public enterprises prevailing on the stock market. The basis for comparison is the price per unit share of a joint stock company. Used to value non-controlling interest. Transaction method -
3. For comparison, data is taken on sales of controlling stakes in companies or on sales of entire enterprises, for example, during acquisitions or mergers. The method is used when purchasing a controlling stake in a public company, as well as to evaluate closed companies that operate in the same market segment as open companies and have similar financial indicators. Includes analysis of multiples. Industry coefficient method -
involves the use of ratios or indicators based on company sales data by industry and reflecting their specific specifics. Industry coefficients are calculated by special research institutes on the basis of long-term statistical observations of the selling price of enterprises and their most important production and financial characteristics.
The method of industry coefficients has not yet received sufficient distribution in domestic practice, since the market for the purchase and sale of ready-made businesses in Russia is just developing, information on the real prices of transactions is often unavailable, and a long period of observation is required to obtain more accurate results. Businesses can differ significantly from each other. Therefore, to compare them it is necessary:
adjustments
If the types of activities of enterprises differ and some of the activities are not attractive to the buyer, a portfolio discount is applied to the price;
If an enterprise owns non-productive fixed assets, they must be assessed separately from fixed assets for production purposes, taking into account property tax, etc.;
If, as a result of the financial analysis, an insufficiency of own working capital or the need for capital expenditures is revealed, these amounts are subtracted from the initially obtained value of the enterprise;
The lack of liquidity inherent in closed companies requires an appropriate discount.
Limited supply; market concentration on shares of several major issuers.
Dividing the market into small segments formed by separate trading systems.
Distortion of value as a result of manipulation and various prohibited practices.
In practice, JSCs are often closed to investors. The circulation volume of shares in many OJSCs does not exceed 1-5% of the authorized capital.
Distortion of information about the financial and economic activities of the issuer
Basic concepts:
1. Capitalization = Price of 1 ordinary share * Total number of shares (7)
2. Invested Capital = Equity (Capitalization) + Debt + Preferred Shares (8)
3. Financial base (indicator) - any indicator of the financial and economic activity of an enterprise
4. Multiplier = item 2 / item 3 (rarely – item 1 / item 3) (9)
5. Transaction price – the amount of money actually paid for the object of the transaction
6. Quote – a quote to buy or sell shares on the stock market.
Transaction method
Stages of the Business Valuation Process capital market methods and transactions coincide:
1) market research and search for similar enterprises for which there is information on transaction prices or share prices;
2) financial analysis and increasing the level of comparability of information;
3) calculation of estimated multipliers;
4) application of multipliers of the enterprise being valued;
5) selection of the value of the enterprise being valued;
6) making final adjustments to the degree of control. Along with the coincidence of assessment stages, capital market and transaction methods have differences (Table 2)
Table 2 - Main differences between capital market and transaction methods
|
Differences |
Peculiarities |
|
|
capital market method |
transaction method |
|
|
Types of Initial Pricing Information |
Prices for individual shares of similar enterprises |
Sales prices of controlling stakes and entire enterprises, information on mergers and acquisitions of enterprises |
|
Time of analyzed transactions |
Current stock price data |
Information about previously completed transactions |
|
Accounting for control elements |
The price per share does not take into account any control elements |
The price of a controlling interest or the enterprise as a whole includes a premium for elements of control |
|
Evaluation result |
Cost of one share or non-controlling interest |
The value of a controlling stake or the enterprise as a whole |
When making additional adjustments, each of these methods makes it possible to evaluate both a controlling and non-controlling stake in the enterprise.
If you need to evaluate a controlling stake in an enterprise, and there is information on analogues only about actually sold non-controlling stakes, an appropriate adjustment is made and the preliminary cost is increased by the amount of the control premium.
If you need to evaluate a non-controlling interest, then the value of the non-controlling discount is subtracted from the result obtained by the transaction method.
The most common method of calculating control premiums is to compare the price at which shares of a peer company were traded at free market some time (usually two months) before the merger or acquisition transaction. The difference in price, expressed as a percentage of the price of a non-controlling stake, represents the value of the control premium and is the basis for determining a reasonable control premium, which the appraiser can adjust based on the available information on the company being valued.
Basis for calculating value using the transaction method:
Transaction price with shares in capital,
The price of the last transaction in shares on the stock market,
Average or weighted average price for a certain period (3-6 months),
If there are no transactions, the weighted quote = 0.6-0.7 * buy quote + 0.4-0.3 * sell quote.
Transaction method. Information sources:
1. Russian stock market
– Russian trading system (www.rts.ru)
– Moscow Interbank Currency Exchange (www.micex.ru)
– Information agencies – RosBusinessConsulting (rbc.ru), AK&M (akm.ru), Finmarket (finmarket.ru)
2. Foreign trading platforms
e.g. Frankfurt Stock Exchange, New York Stock Exchange (NYSE)
3. Information from periodicals, company websites
Simplified transaction method algorithm:
1. 5 shares of the subject of valuation were sold at $10 per share. There are a total of 5,000 shares in the company's capital.
Cost of equity capital = 10*5000 pieces*(1+premium))
2. 30% of the business was sold for $500 thousand => business value 500/0.3*(1+control premium)
Analogue company (capital market) method does not depend on whether the shares of the valuation object are quoted on the stock market.
Condition of use:
There are a sufficient number of comparable enterprises whose securities are quoted on the open market, or with large blocks of shares in which market transactions have been made in the recent past,
Availability of internal financial information on industry enterprises.
Information sources:
1. Financial information of peer companies
– Federal Commission for the Securities Market fcsm.ru
– Company websites
2. Information on the value of shares of peer companies
– See transaction method
- Database:
3. Foreign analogues
– Reuters; Bloomberg
– Corporate Information,
- other.
The main stages of the analog company method:
Stage I. Compiling a list of comparable enterprises.
Stage II. Gathering the necessary information.
Stage III. Comparability analysis
– Financial analysis, calculation of deviations by indicators.
– Increased level of comparability.
Stage IV. Calculation of price multipliers.
V stage. Selecting the final multiplier value.
Stage VI. Determining the final value of the value by multiplying the selected multiplier by the corresponding indicator of the valuation object.
VII stage. Making final adjustments.
Adjustment for degree of control and liquidity.
Selection of analogue companies:
Stage 1. Analysis and preliminary selection of industry enterprises. The maximum number of comparable enterprises is determined.
Criterion:
1. Industry affiliation. Comparable activities and products/services.
2. Availability of pricing and financial information.
Stage 2. Selection of analogues - the most comparable enterprises.
Criteria :
– Traditional theory – selection based on the results of financial analysis. In practice - comparability of production volumes, production potential and capacity, and key performance indicators.
– Comparability of business processes.
– Main markets.
Stage 3. A list of enterprises is generated to calculate multipliers.
Criteria:
– Theoretically, the calculations are identical (for example, methods of depreciation, inventory accounting, taxation, etc.).
– Stage of development and growth prospects.
– Financial risks (state of the enterprise) and availability of credit resources
– Goodwill company.
To determine comparability, the percentage deviation of an indicator for objects of comparison from a similar indicator for the object of assessment can be calculated using the following formula:
Price multiplier- this is a coefficient showing the average ratio between the price of enterprises in the industry and any indicator of financial and economic activity (financial base).
To determine the value of the valuation object, the resulting price multiplier (coefficient) is multiplied by a certain financial indicator of the company being valued.
(11)
Methods for calculating the price of a similar company:
1. Analogue price= Capitalization = Price of 1st JSC x Number of JSC (12)
2. Analogue price= = Price of the 1st JSC x Number of JSC + Price of the 1st AP x Number of AP + long-term (or all) debt (%) (this is both a loan and bonds) (13)
It is preferable to use the second method, because it allows you to take into account the capital structure of analogues and the valuation object.
Sometimes buy and sell quotes are posted for stocks, but the trading system does not show the transaction price, or the transactions are not completed at all. In this case, the purchase quote, reflecting the demand for these securities, or the average of two quotes can be used as a price guide. Quotations may also be examined for a certain period, which, in the opinion of the appraiser, is representative. Based on them, the most probable cost was derived.
Examples of price multipliers:
– Interval:
1. Price/earnings (P/E);
2. Price/cash flow (P/CF);
3. Price/Volume of production (in physical and monetary terms);
4. Price/Result from sales.
5. Price/dividend payments (more for preference shares),
– Momentary:
1. Price/book value (P/BV);
2. Price/fixed assets.
The selection of the multiplier is carried out by the appraiser:
P/Volume of production, P/Volume of reserves - fully characterize the performance indicators of the enterprise and its production potential. They are not distorted due to various optimization schemes and the specifics of corporate governance.
P/E – in the world practice of investment analysis;
P/CF – taken into account for enterprises with significant fixed assets.
P/Sales is one of the main indicators for industries whose main performance indicator is turnover. There is a directly proportional relationship between P/Sales and profitability of sales.
P/Balance Value – there is a correlation with the amount of equity capital. The higher the profitability of the insurance company, the higher the multiplier value.
R/Dividends – only for minority stakes, most often – for preferred shares.
Selecting the final multiplier value among all multipliers obtained from analogues:
Mean, median or weighted average
Based on the correlation between the indicator on which the multiplier is calculated and the cost
Based on the relationship between the multiplier and the corresponding financial ratio
Based on the results of financial analysis
To determine the value of the valuation object, the resulting price multiplier (coefficient) is multiplied by a certain financial indicator of the company being valued.
(14)
Final adjustments to cost in the peer company method:
If the multiplier was calculated based on invested capital => adjustments:
– The value of the preferred shares of the valuation object is deducted
– The market value of the debt is deducted
Traditional amendments:
Control premium
Discount for low liquidity
Less commonly introduced:
Excess / Deficit of JUICE
Non-functional assets
Simplified algorithm of the analog company method:
1. 30% was sold for $500 thousand => business value 500/0.3*(1+premium)
2. Price of analogue 100, Net profit of analogue = 50, C/PP multiplier = 2
3. PE of the valuation object = 40, cost = 2*40*(1+Control premium)*(1-discount for lack of liquidity)
Method of industry ratios (synonyms: method of industry coefficients, formula method) consists in determining the estimated value of an enterprise using ratios or indicators based on sales data of companies by industry and reflecting their specific specifics. Industry coefficients or ratios are calculated, as already mentioned, on the basis of statistical observations by special research institutes.
The market for the purchase and sale of ready-made businesses in Russia is just developing, so the method of industry coefficients has not yet received sufficient distribution in domestic practice. In the West, the business market has been developed for a long time and, as a result of generalization, fairly simple relationships have been developed to determine the value of the enterprise being valued.
The method is advisable to use only in cases where such enterprises are often sold, and the appraiser has accumulated experience in assessing objects of this type. Moreover, industry ratios can be developed by the appraiser independently based on analysis of industry data. The most typical ratios used in determining the estimated value of a business in market countries are shown in Table 3.
Table 3 - Industry ratios for determining business value
The sectoral ratio method is gradually finding application in Russian practice, in particular in connection with the introduction of a single tax on imputed income, when it is possible to find out the estimated income of a business and compare it with sales prices.
So, to evaluate the company comparative approach price and financial information on similar enterprises is used. The list of similarity criteria begins with industry affiliation and depends on the specific conditions of the assessment, but the final decision on similarity is made based on the results of financial analysis. The comparative approach is applicable if the list contains at least three analogous companies.
The assessment of market value using comparative approach methods is based on the use of price multipliers that reflect the ratio of the market price and some indicator reflecting the profitability of the enterprise. The price multiplier is calculated based on analogues and is used as a multiplier to the adequate indicator of the company being valued.
In valuation practice, the following types of price multipliers are most often used:
"Price / Profit";
"Price / Cash Flow";
"Price / Dividend"";
“Price / Sales revenue”;
“Price/Physical volume”;
"Price/Book Value".
Calculation of the total value of the enterprise carried out in three stages:
1. Selecting the multiplier value that is appropriate to apply to the object being evaluated.
2. Agreement on preliminary results.
3. Adjustment of the final cost.
The value of the price multiplier calculated for each of the peers can vary significantly, so the appraiser must decide which value should be applied to the company being valued using the results of financial analysis. Preliminary results of market value obtained based on the use of various types of price multipliers are subject to an approval procedure based on expert weighing. The specific weight given to each result depends on the quality of the initial information, the specific conditions of the assessment, and the role of the price multiplier.
The final adjustments ensure greater objectivity of the assessment results. The use of a system of bonuses and discounts makes it possible to take into account the influence of significant additional factors, such as the adequacy of invested capital, the presence of non-performing assets, and liquidity. The ability to include a control premium makes the peer company method more universal and applicable for estimating the controlling share of a firm's equity capital.
The comparative approach and its main methods are based on the use of a large volume of price and financial information on a significant range of enterprises. The need to process a large information array in order to identify the dependence of the market value of a company’s equity capital on various pricing factors requires the use of mathematical methods to various stages assessments.
Transaction method is a method of assessing the value of an enterprise (business) using a comparative approach. It is based on the use as an information base of real market prices for the purchase and sale of controlling stakes or a 100% stake in enterprises (companies) similar to the one being valued.
The method determines the value of the assessed share of equity capital, taking into account the control premium. It is more expedient to use the transaction method if the object of assessment is the entire business or a controlling stake.
Estimating the value of a business using the transaction method includes the sequence of work.
1. The appraiser selects companies belonging to the same industry as the one being assessed, for which there is reliable information on the market price of their share capital. Then, for the selected companies, additional information is collected about their financial and business condition and a financial analysis of the company being assessed and its peers is carried out.
Based on the results of the financial analysis, a decision is made on the degree of similarity of analogues with the company being evaluated and its rating is determined.
2. Estimate multipliers are calculated. The estimated multiplier (a coefficient showing the ratio of the market price of share capital or its share to a financial indicator reflecting the profitability of the company) is calculated according to analogues, and is used as a multiplier for a similar financial indicator of the company being valued. For example:
- the market price of a similar company is 3000, net profit is 300;
- then the estimated multiplier is 3000: 300 = 10;
- if the profit of the company being valued is 250, then its estimated market value will be 250 * 10 = 2500.
The difficult part of this stage is the choice of the multiplier value that should be applied to the company being evaluated, since the range of values can be wide. The basis for the choice is the results of financial analysis, reflecting the place of the company being evaluated among its peers.
3. The appraiser calculates the final value. Evaluation results obtained using various types multipliers are analyzed according to the degree of reliability, the number and validity of preliminary adjustments, and their significance for the specific object being assessed.
The final value of the cost is calculated as the weighted average of the preliminary results, with final adjustments, such as adjustment for the presence of non-functioning assets, lack of property. working capital, etc.
The value found using the transaction method is comparable to the results obtained using methods inherent in the income approach and the cost approach to assessing the value of a business.
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The main feature of the comparative approach to business valuation is the orientation of the final value, on the one hand, to the market prices of purchase and sale of a similar business, and on the other hand, to the actually achieved financial results. The main advantage of the comparative approach is that the appraiser focuses on the actual purchase and sale prices of similar enterprises, which are determined by the best appraiser - the market. In addition, another advantage is the accounting of specific financial documents of the enterprise.
However, this approach has the following serious disadvantages that limit its use in valuation practice:
The calculation basis is the financial results achieved in the past. The development prospects of this enterprise are largely ignored.
A comparative approach is only possible if there is a variety of available financial information not only for the company being valued, but also for analogue companies selected by the appraiser, which is not always realistic in practice.
Since in practice there are no absolutely identical enterprises, the assessment requires making rather complex adjustments, which reduces the reliability of the result.
The comparative approach involves the use of three main methods:
1. The company's method is analogue.
2. Transaction method.
3. Method of industry coefficients.
The peer company method (or capital market method) is based on the execution of prices generated by the open stock market. The basis for comparison is the price per unit share of open joint stock companies.
The transaction method (or sales method) is focused on the acquisition prices of the enterprise as a whole, or a controlling stake.
The industry coefficients method (or industry ratio method) is based on the use of recommended relationships between price and certain financial parameters. For example, the business valuation literature provides the following examples:
Enterprise price retail= 0.75 - 1.5 net annual income + the cost of equipment and supplies available to the enterprise.
Let us explain the essence of the comparative approach using the example of a similar company’s method.
When implementing this method, an enterprise similar to the one being valued that was recently sold is selected. Then the relationship between the sales price and any financial indicator for a similar enterprise is calculated. This ratio is called the price multiplier. By multiplying the multiplier value by the same basic financial indicator of the company being valued, its preliminary value is obtained. After this, final amendments are made.
Example.
It is necessary to evaluate an enterprise that made a profit of 12.5 million rubles in the last financial year. The appraiser knows that a similar company was recently sold for RUB 600 million. (CTA is the cost of the analogue). The similar company’s emergency profit for the same period amounted to 60 million rubles. It is required to estimate the preliminary value of the company.
In valuation practice, two types of multipliers are used – interval and moment.
