How to evaluate a ready-made business? Express valuation model of the company How to determine how much your business is worth.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The slightest resistance of 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.

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

Advantages of a ready-made business:

• History of development, good or bad, which makes it possible to evaluate it.
• Availability of premises and equipment.
• Completed staff.
• Established relationships 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:

• The equipment may be worn out, and technological processes- outdated.
• The lease may not be renewed.
• Staff may be underskilled
• Counterparties may be unreliable, relations with them could be spoiled by the previous owner.
• Subsequently, debt obligations (unpaid taxes, penalties and customs duties or warranties).

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 have dreamed of?

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

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

4. Are you interested in import-export business?

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

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

STEP 3. Decide on funds

First of all, decide how much of your 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: the possibility of raising borrowed funds for the acquisition of a business depends on the availability of liquid fixed assets and real estate. If you are acquiring a business that owns such assets, then in most cases 50% of total cost business or investment project you can take on credit. Your personal assets can also serve as collateral for a loan to buy a new business.

STEP 4. Choose the cost-effective options

Entrepreneurs who want to sell their business place ads in newspapers free ads or in the line ads department of local periodicals, in any business publications or newsletters, on specialized Internet sites. Another source of offers is brokerage 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 for the strictest confidentiality regime, as the announcement of the sale can cause excitement among customers, employees and suppliers. And many potential sellers prefer to use face-to-face 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 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 was reached on the ways of further development of the company.
• Loss of interest in business. After 6-8 years, the activity may simply cease to be satisfying.
• Illness, old age. Limited opportunities for the owner to manage the business, and there are no worthy successors to the business.
• 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 activities of large enterprises or holdings are less profitable or do not fit into general concept development.

In principle, all reasons can be grouped as follows:

• this business has ceased to bring sufficient profit (there is a recession and decline in business activity in the industry; the company is under the threat of bankruptcy; weak management; the company is involved in criminal scams, etc.);
• the owner is going to do 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 expedient 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 options remain.

In conditions Russian market it is not yet possible to estimate the value of a company based on the market value of its shares, since only large enterprises are listed on the open stock market. Therefore, when evaluating small and medium-sized businesses, experts recommend using the following approaches: profitable, market and costly.

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 earnings for the period of interest. Using this approach, the buyer calculates various options business development. However, with this approach, the level of risk is often determined too subjectively. This valuation method is good if the company's income is positive and stable.

Market Approach

The value of a business 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 company being valued (V1) is determined as the product of the ratio of the market price of an analogue company (V2) and its base indicator (R2) to the base indicator (R1) of the company being valued: V1=V2/R2×R1. The basic indicators are usually: net profit, book value of the enterprise. When choosing comparable 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 cost of a business is determined by the amount of resources spent on its reproduction or replacement, taking into account physical and obsolescence. This approach is most effective when the buyer is going to compare the cost of acquiring a business with the cost of setting up a similar business.

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

Note: at this step, 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 areas of law, mathematical analysis, economics, accounting and auditing.

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

STEP 7. Study the chosen business in detail

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

If there are not many doubts, and the amount of the transaction is not so large, you can try to do the above procedure yourself: ask as many questions as possible, require reporting, inquire about numbers and models of equipment and dates of their purchase, inquire 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!

Serious reasons for concern are also:

1. Shortened rigid time frame for selling a business.

2. Missing key information on the object.

3. Obtaining even existing information is difficult.

4. There is no clear reason for the sale or justification for the reason for the sale is not credible.

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

STEP 8. Minimize possible risks

1. Make inquiries about anything that could potentially harm your business.

2. Find out the state of the property complex and the features 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 for the volume of profit and turnover of the company, declared by the seller.

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

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

6. In the agreement with the seller, it must be indicated that the new owner acquires only those debts related to the activities of the enterprise that are specified in the agreement. And the debts connected with the previous activity of the enterprise, do not pass to the new owner. The agreement and annexes to it must contain a detailed list of all debts included in the enterprise, indicating the creditors, the nature, size and timing of their claims.

STEP 9. Start negotiating a purchase

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

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

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

STEP 10. Get a business!

reference

Ready-made business sales market: results of 2006

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

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

Offers of $10-20 thousand prevail among travel agencies, for which the demand is usually very insignificant. Worthy offers can be considered travel companies that have not only a travel agency, but also a tour operator license, having their own representatives abroad and contracts with hotels and inns. But the price of such a company will already be from $30,000 and more.

There have been certain preferences in acquiring a business related to the provision of intangible services: consulting, auditing companies, educational institutions. Investors are ready to invest up to $150,000 in such companies that have existed for more than 5-7 years and have all the necessary licenses and permits. Such types of businesses as modeling and concert agencies began to be offered. There were more proposals for the sale of advertising and advertising production companies.

In the field of medicine and pharmacology, there is an oversupply of medical centers and dental clinics, and, on the contrary, 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 malls worth 30-180 thousand dollars.

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 such a type of business 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 low.

Estimating the fair value of shares or their intrinsic value is not an easy task, but it is useful for any investor to be able to do this in order to determine the feasibility of an investment. Financial multiples such as Debt/Equity, P/E and others provide an opportunity to evaluate the total value of shares in comparison with other companies in the market.

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

Be warned: this article may take a lot of 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 how much dividend payments will be received by the holders of securities, whether the company will be able to fulfill its debt obligations in a timely manner, and direct money to buy back shares.

A company can have a positive net income, but a 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 a 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 reduced to their fair value in the present using a discount rate, which is nothing more than the required return or cost of capital.

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

In this regard, as the discount rate, we will take the indicator WACC (Weighted Average Cost of Capital) is the weighted average cost of capital. A company's WACC takes into account both the value of the firm's equity capital and the value of its debt obligations. How to evaluate these two indicators, as well as their share in the company's capital structure, we will analyze in the practical part.

It is also worth considering that the discount rate may change over time. However, for the purposes of our analysis, we will take a constant WACC.

To calculate the fair value of the shares, we will use a two-period DCF model, which includes interim cash flows in the forecast period and cash flows in the post-forecast 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 share of the total value of the company being valued, as we will see later.

So, we have analyzed 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 score:

1. Calculation of the current value of the enterprise.

2. Calculation of the discount rate.

3. Forecasting FCF (UFCF) and discounting.

4. Calculation of the terminal value (TV).

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

6. Calculation of the fair value of the share.

7. Building a sensitivity table and checking the results.

For analysis, we will take the Russian public company Severstal, financial statements which is 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 current value of the enterprise

Enterprise Value (EV) is, in fact, the sum of the market value of capital (market capitalization), non-controlling interests (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 the total debt (precisely financial debt: long-term debt, debt payable within a year, financial leasing) net of 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.

Consider the formation of elements for WACC.

Share of own and borrowed capital

The calculation of the share of equity is quite simple. 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 amounted to 85.7%. Thus, the share of borrowed funds is 100% -85.7%=14.3%.

Equity cost

Pricing models will be used to calculate the required return on equity investment financial assets(Capital Asset Pricing Model - CAPM).

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

Let's start with the 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'll take ERP data from Duff & Phelps, a leading independent financial advisory and investment banking firm whose scores are used by many analysts. In essence, ERP is a risk premium that an investor who invests in stocks receives, and not a risk-free asset. ERP is 5%.

The industry beta values ​​for emerging capital markets of Aswat Damodaran, renowned professor of finance at Stern, were used as the beta. school business at New York University. Thus, the unlevered beta is 0.90.

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

Thus, we get that the leverage beta is 1.02.

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

Cost of borrowed capital

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

In our example, we will not delve into the structure of Severstal's debt, but will follow a simple path: we will take the amount of interest payments and divide by the company's total debt. 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 -Taxes + Depreciation & Amortization - Capital Expenditures +/- Change in non-cash working capital

We will act in stages. We first need to forecast revenue, for which there are several approaches that 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 that sustainable development companies in the future. For many DCF models this will be sufficient.

The second method involves predicting all 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. A regression analysis is often 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. In addition, the second approach is individual. For each company, you need to choose your key factors of influence on financial results, so it will not be possible to formalize it under one standard.

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

We forecast revenue based on the fact that it will change at an average pace (1.4%). By the way, according to the Reuters forecast, in 2018 and 2019 the company's revenue will decrease 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 the average margin. We get the following:

In the FCF calculation, we need the EBIT figure, which is calculated as:

EBIT = EBITDA — Depreciation&Amortization

We already have an EBITDA forecast, it remains to predict depreciation. The average depreciation/revenue for the last 7 years was 5.7%, based on this we find the expected depreciation. At the end we calculate EBIT.

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

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

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

Meanwhile, Severstal has already confirmed its 2018-2019 capex plan at over $800m and $700m, respectively, above investment in recent years due to the construction of a blast furnace and a coke oven battery. In 2018 and 2019, we will take CapEx equal to these values. Thus, the FCF may be under pressure. Management is also considering the possibility of paying more than 100% of free cash flow, which will mitigate 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 inventories and receivables reduces cash flow, while an increase in accounts payable, on the contrary, increases it.

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, to begin with, we need to fix our revenue (Revenue) and cost (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 link accounts payable and accumulated liabilities to the cost price.

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

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.

Calculate 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, discount the cash flows received. 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 estimate the terminal value. Either the Gordon model is used, or the method of multipliers. We will take the second method, using EV/EBITDA (EBITDA for the last year), which for Severstal is 6.3x.

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

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

After clearing net debt and non-controlling interests, we get fair value share capital - $11,566 million. Divided by the number of shares, we get the fair value of the share in the amount of $13.8. That is, according to the constructed model, the price of Severstal's securities at the moment is overestimated by 13%.

However, we know that our value will fluctuate 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 as the multiplier increases and the cost of capital decreases, 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 noted that we built a simplified model and did not take into account growth drivers, for example, rising product prices, dividend yields that are significantly higher than the market average, external factors, and so on. To present the overall picture of the company's valuation, this model is well suited.

So, let's 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

Identifies the "inside" side of the business, which is related to the cash flows that are important to the investor

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

Among the shortcomings can be noted:

Requires a large number of assumptions and forecasts based on value judgments

Quite difficult to build and evaluate parameters, for example, discount rates

A high level of calculation detail can lead to investor overconfidence 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 the 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 as to where this or that investment house took a long-term target (goal) for the price of a share, then the DCF model is just one of the elements of business valuation. Analysts do much the same work as described in this article, but most often with even more in-depth analysis and setting different weights for individual key factors for the issuer as part of financial modeling.

In this article, we have only described a good 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 DCF valuation of the company, but also a number of other corporate events, assessing the degree of their impact on the future value of securities.

Once a year for management analysis

Someone from the wise noticed that the goal will be achieved not by the one who moves faster, but by the one who moves in the right direction. Before answering the question of how to evaluate a business, it is necessary to understand why the evaluation is carried out.

In the general case, valuation is carried out in two situations - when making a transaction (it can be a sale and purchase, pledge, mergers and acquisitions, etc.) or when making a management decision. In the first case, as a rule, it is necessary to involve a professional appraiser, who, on the one hand, acts as an independent arbitrator for the parties to the transaction, and on the other hand, has the necessary methodological tools for a comprehensive assessment. In the second case, we are talking about the value of the value, which serves as a guide for the owners and top managers of the business. This cost can be calculated by the entrepreneur himself. It is this assessment that will be discussed in the article.

The goal of any business activity is to make a profit. As a result, net profit goes either to pay dividends to owners or to increase the capitalization of the company. It is quite easy to find out the capitalization of public, listed companies. For example, Gazprom has 23.6 billion shares, which are listed at around 152 rubles per share as of the date of writing. Thus, the capitalization of Gazprom is 3.6 trillion. rubles. Everything is simple. The answer to the question of how much the “shares” of a cafe, service station, laundry cost is more complicated, but much more important for a small business owner.

There is no universal formula, substituting a couple of numbers into which the owner will receive the exact value of his business. Imagine that business is a child: this one is stronger, this one is smarter, this one is smarter. Who's to say that an A in math is more important than an A in physical education? Can there be a single method for determining the value of an automobile manufacturing business, an IT company and travel company? Apparently not.

Business valuation is based on the use of three main approaches: cost, comparative and profitable. Each of these approaches reflects different sides of the company being valued, namely: the side of the seller, the buyer and the market. Within the framework of this article, only one method of the comparative approach is considered. To determine the price of a transaction, this is not enough, but for conducting a management analysis, at least once a year, it is quite enough.

But first of all, it is necessary to establish some restrictions and assumptions.

First, formulas are formulas. Valuation formulas are applicable to a business that has a market value or, in other words, can be sold. However, in practice, a small business that generates income and uses assets efficiently cannot always be sold for a number of reasons. For example, the income of the business being valued may depend on the unique abilities of the owner (no one needs a business for the production of souvenirs if the only virtuoso-master is the owner). Or, in some cases, it is unprofitable for the buyer to acquire an existing business at an estimated price, since it can be quite easily opened from scratch.

Secondly, the assessment is "as is". A business, like a living organism, can be in different states. It can be healthy, but it can be very sick. It is one thing to evaluate an existing, only re-equipped enterprise with a streamlined production cycle, and another - an enterprise with bailiffs on the doorstep. The article deals with the valuation of a business in the "as is" state, i.e. subject to the constancy of the main factors that shape this business.

Thirdly, no one knows better than a business owner, even tax office. Therefore, the calculation of the value of a business should be based on real numbers and facts, and not on financial statements.

Components of business value

Determining the value of a small business based on simple multipliers

The formula for calculating the cost of a small business is as follows:

V B \u003d V RA + V TZ + (V DZ -V KZ) + V DS + V NI,

V B - business value

V RA - settlement assets

V TK - inventory

V DZ - accounts receivable

V KZ - accounts payable

V DS - cash on account and in cash

V NO - market price real estate.

It is better to analyze the formula from the last term.

As a rule, a small business is built on rented premises, so the V NI indicator is 0. If a business is built on its own premises, then their cost is simply added. The cost of real estate is quite simple to determine by contacting a real estate agency.

It is possible that the organization being assessed has some cash on hand, in a current account or in bank deposits. Their sum is the value of V DS.

As a rule, no enterprise can exist without debts. At the same time, the enterprise may have both its own debts (accounts payable), and it may also be owed to the enterprise (accounts receivable). Their difference is the value of V DZ -V KZ.

Some types of small businesses require a significant amount of inventory. Their cost should also be added to the cost of business V TK.

And finally main indicator V RA, which determines the cost of an entrepreneur's labor in organizing sales, setting up business processes, hiring personnel, etc., is the cost of settlement assets. The basis for their calculation, as a rule, is the average monthly revenue or annual net profit. Multiplying the corresponding indicator, we obtain the last term of the formula.

For example, a cafe located on its own premises (150 sq. m.) in the Zasviyazhsky district of the city of Ulyanovsk (4.5 million rubles) is being evaluated. The average monthly income of the cafe over the past six months is 0.4 million rubles. The company's revenue grew by 5% in six months. There was a circle regular customers that bring at least 30% of revenue. The enterprise has an outstanding loan in the amount of 1 million rubles. As of the assessment date, the cafe purchased food and alcohol for 0.3 million rubles. There are funds in the account in the amount of 0.2 million rubles.

The cost of such a business will be from 5.2 million to 6.8 million rubles

At the same time, taking into account the positive dynamics of revenue, as well as the presence of regular customers, the most probable value of the business is approaching the average value.

Since the method under consideration offers the owner a range of price multipliers, he will inevitably face the problem of choosing the most objective value applicable to a particular firm. To resolve this issue, it is advisable to consider the most significant factors on which the market value depends:

1. The quality of amenities offered by the firm being assessed

2. Dynamics of cash flows generated by the business

3. The state of the company's inventory

4. Level of competition

5. Opportunity to create a similar business

6. Regional trends in economic development

7. State of the industry and prospects for its development

8. Rental conditions

9. Location

10. Phase life cycle business

11. Pricing policy

12. Product quality

13. Reputation

As you can see, valuing your business is quite a feasible task.

If you have any questions, please contact e.fedorov@delo73.ru.