For many Belarusian owners, the issue of business valuation causes difficulties. Financial analyst Zubr Capital Viktor Denisevich talks about the most practical valuation method and gives a formula for calculating the value of a company.

Valuing a company is like playing chess. A chess player who plays white and one who plays black can evaluate the position on the board differently. Likewise, the owner and investor are likely to have different look for the same company.

Obviously, this happens because the owner and investor different goals. From the owner - to sell the company or part of it for the highest possible cost, from the investor - to buy a share or the entire company for the lowest possible amount.

When it comes to assessing the value of a company, there are an almost infinite number of ways to form it. But the most practical and adequate in this matter is comparative method.

Its essence is that you form an estimate, not only based on the internal resources of the company, but, first of all, based on information about the value of peer companies.

Let's say we have a conditional company "A", which is engaged in the production of shoes in Poland. Let's look at her example, how the valuation of the company is formed.

If you want to know the value of your company, then, first of all, you should start with a benchmark. That is, choose companies-analogues and analyze their value. Of course, the availability of this information depends, first of all, on the development of the stock market and the openness of the M&A market in the region.

The first difficulty that you will encounter is the almost complete lack of information about peer companies, on the basis of which you can build an assessment in our country. How to solve this problem?

There are two verified sources of information:

• data from public companies around the world
• information about M&A transactions not only in Belarus, but also abroad

As a result, you will receive an array of data for different companies, regions, etc. Now the task is to choose the correct peer companies on the basis of which you will make your assessment. For this you need:

1. Identify a broad sample of companies based on general criteria that characterize your company (industry, region, revenue, product or service).

Let's look at our company "A". Using data on public businesses, we will compile a list of companies involved in the production of shoes in Europe. Here are 11 companies that, in their main characteristics, are similar to ours.

2. The next step is to narrow down this list using niche criteria. This includes market share, level of competition, management team, growth potential, financial indicators etc.

In our example, we will adjust the sample based on financial indicators. Companies with revenue from $30 million to$ 150 million. So, we got 5 companies (highlighted in dark). Revenue figures are in $ million.

The next step is the choice of a multiplier, on the basis of which we will evaluate our company.

Historically, there have been 3 types of multipliers:

• interval(determines the value of a company based on its performance and is the most common, such as EV/EBITDA)
• moment(the value is determined based on the performance of the company at the reporting date, for example, from the statement of financial position)
• branch(there are specific multipliers for each industry, for example, the number of wells for an oil company)

Suppose, as a result, you have a sample of 5 peer companies, and each of them has its own multiplier value. The next goal is to determine the value of the multiplier for your company based on the data obtained. For this you need:

1. Cut off extreme and/or unrepresentative values ​​of peer company multiples.

After reviewing more detailed data, we found that the multiple for Fenghua SoleTech AG is not representative.

2. "Weigh" intermediate results

After analyzing the remaining companies, we came to the conclusion that based on the region, strategy, market share, financial indicators, we should use the following weights to calculate the multiplier.

As a result, we got that the multiplier for our company "A" is 6.296.

3. Make final adjustments(for example, discounts by region).

We must understand what fundamental dependencies affect the formation of the multiplier.

This dependence is expressed by a formula that at first glance seems terribly complex.

EV/EBITDA = f(G,Ke,MARG,T) = f(G,BETA,DUM,MARG,T)

In fact, this formula answers the fundamental question: “What determines the value of your company?”.

It depends on:

• the marginality of your business, that is, the net profit margin (abbreviation "MARG")
• from the country in which your company operates (indicated by the abbreviation "DUM")
• from the industry in which you work (in our formula it is "BETA")
• from the tax rate that falls on your company ("T" - in our formula)
• the company's growth potential in the coming years (we use it as a G variable)
• company's cost of equity (usually denoted by the symbol "Ke")

Thus, the company's value is affected not only by internal factors (the amount of equity capital, profitability, etc.), but also by external ones - for example, the so-called "country risks".

Each country causes certain risks for the investor.

In the same way, industry risk is determined, which also affects the company's valuation.

Let's calculate the adjustments for our company "A". Initially, our multiplier was set at 6.296. Let's look at the risks: we can exclude some of the risks and variables, for example, the country risk, because practically all companies from Poland got into the field of our comparison.

If we assume that the profitability of our company is somewhat lower than the industry average in Poland, then we need to take into account the discount on profitability. In addition, Company A does not have audited accounts for international standards. In this connection, it is necessary to make a discount to our calculated multiplier.

As a result, our company will cost 5.91 EBITDA.

Thus, in the example of the conditional company "A", we see that the cost depends on many variables and contexts that are important to consider.

You can see how different estimates can differ for the same company on the Deal simulator.

All in all, valuing a company is as exciting as playing chess.

Viktor Denisevich

He is engaged in market analysis, financial due diligence, preparation of analytical data for the board of directors, actively participates in the development of financial models of strategies.

In 2013 he received the ACCA certificate (dipIFR). Currently undergoing CFA training.

Articles

How to evaluate a ready-made business?

A few seditious thoughts

I am sure that professional appraisers will not like this article. Many of them may even want to crucify me upside down on the cross for seditious thoughts about the appraisal business. The fact is that the role of this sphere, its place in the modern economy, especially in small and medium-sized businesses, are often exaggerated, redundant, and practical conclusions are controversial.

What is by and large market valuation business? This is a determination of the cost for which it can be sold, and what profit it will bring in the future. Professional appraisers have several basic valuation methods at their disposal, the content of which is widely covered in the valuation literature and enshrined in valuation legislation.

Three methods are used in Russia: "income approach", "cost approach" and "comparative approach". All these methods are complex, require special training, and for an ordinary entrepreneur, whose motto is "act and earn!", They will seem unnecessarily complicated and have a very distant relation to his activities in the form of a pair of outlets, a car service or an online store.

Maybe appraisers are right with their calculations when it comes to large enterprises and transnational corporations?

Alas, not always. Otherwise, the stock market, trading in stocks and other securities would simply die, or would never experience the colossal fluctuations that we periodically observe. Indeed, in the stock markets, especially in countries with developed and rapidly developing economies, colossal money is spinning. Investment funds, management companies, before purchasing shares or bonds of certain companies, actually conduct a thorough assessment of the value of enterprises, rightly expecting a certain level of dividends or capital gains.
If business valuation methods were correct, then the movement of funds in the stock markets would be insignificant, since everyone represented quite accurately how much one could get by investing in a particular company. In fact, the stock market is very volatile and subject to significant fluctuations, sometimes contrary to the obvious logic and methods of calculating business valuation.

Take, for example, the latest stock market crisis. China suffered the greatest losses - since the beginning of this year, the total index of shares of Chinese enterprises has decreased by 20 percent. At the same time, China's GDP growth in 2007 amounted to 11.4 percent, the forecast for 2008 is approximately the same. So where did a fifth of the Chinese potential evaporate in a short time? It turns out that professional appraisers corrected their forecasts so quickly, having made a mistake by trillions of dollars?

What do I care, - an ordinary entrepreneur will say, - to China's GDP, investment funds of valuation methods and other high matters? And he will be right. No one but him can better assess the potential and value of his business. Indeed, in most cases, only the entrepreneur thoroughly knows all the weak and strengths their business, as well as the limit of its development. In order to evaluate the business yourself, it is enough to know a few basic points and follow common sense.

Shortcomings of Individuals

Sale ready business serves as a kind of moment of truth for the entrepreneur. The point is not even so much in how you developed it, but in the fact that by the time of the sale, due to ignorance of some legal aspects, its value may turn out to be much less than you imagined it. This is especially influenced by the choice of the organizational and legal form of doing business.

Many Russians, when starting their own business, register as individual entrepreneurs. Yes, this form has a lot of advantages: ease of registration, lower penalties, no need to make a seal and open a current account, etc.

But there are also disadvantages, one of which is directly related to the topic of the article - this form of entrepreneurship does not allow you to sell your business in one fell swoop as a complex of ready-made businesses. It is no coincidence that all business valuation methods enshrined in law are sharpened under legal entities. After all, you are acting as an individual, and all contracts, property, permits, licenses, franchises, rights to trademark and so on are made out to you.

The buyer will have to re-register all this for himself, spending a lot of time and money. Naturally, all costs, including payment for speed, affect the final amount of the transaction. And it is not yet a fact that, by renewing the contract with the new entrepreneur, the landlord will provide the new owner with the same conditions as you. He may simply not like the personality of the buyer.

So, if you intend to sell your business, in advance, minimize the number of documents that require re-registration.
Transfer your status as an entrepreneur to the owner of an LLC or joint-stock company appropriate when your business has reached a more or less significant scale. Then you can safely prepare for its sale in whole or in large part.

On the contrary, when purchasing a business, remember about the possible additional costs associated with the peculiarities of its organizational and legal form - individual entrepreneurs are not sold, only their property is subject to sale, and the rights under the concluded agreements are assigned.

One business, three costs!

When you are about to sell your business, you have little interest in the motives of potential buyers at first. However, it is motivation that can have a significant impact on the final price of the transaction, that is, on its market value. A buyer can have three main goals, but they are all related to generating income:

1. Sale of your business in parts or further resale. It is quite possible that you own real estate objects or the right to lease a land plot located in a promising area where active development of residential buildings or shopping malls. Or is it a resale of a regional brand that you have developed, such as Petrov's Krupa, to some large Russian or foreign agro-industrial holding, which is ousting competitors locally.

Approximately according to this scheme, the once famous Armavir Tobacco Factory, which has now become a haven for numerous offices, was bought out and then resold to one of the international tobacco concerns. In this case, the concept of liquidation value is applicable - the price of assets minus the total amount of liabilities and costs of sale.

2. Income from the activities of the enterprise. The buyer is interested in maintaining and developing the business. Perhaps some repurposing, reorganization or affiliation.

In this situation, we are talking about investment value, which takes into account the increase in profits from market expansion, the use of know-how, reorganization plans of the proposed owner. There's a lot of bargaining to be had here, just as Yahoo's shareholders did when they finally turned down Microsoft's super lucrative $44.6 billion offer. The guys from Yahoo apparently felt that in the future their company would cost much more.

3. The combination of the maximum values ​​of the two values, liquidation and investment, results in a reasonable market value. Sell ​​your business on this very favorable price perhaps, as a rule, to professional investors specializing in the acquisition, development and further sale of a business. These can be local businessmen involved in everything that brings money, and representatives of large companies.

Therefore, if you consider your business profitable and promising, feel free to contact large investment companies and diversified holdings of oligarchs with an offer. Surely they do not know about your existence and, if they are interested, they can give a fair price that is beyond the reach of competitors of your level. You can also advertise on specialized bulletin boards or business portals. Today in Russia there is a lot of money, the owners of which are looking for investment objects.

What is the investor thinking?

Any investor, whether it is an investment fund or your neighbor, thinks about how quickly the invested funds will pay off and begin to generate income. By the way, this is one of the most effective, but at the same time a simple and logical way to assess the value of a business. Professional appraisers would see elements of the "profitable" method in it.

In the late 1990s and early 2000s, an attractive payback period was 1.5-2 years in small and medium-sized, and sometimes even in large businesses in Russia. As the value of the business increased, the payback period increased to 2-3 years. And in large - and up to 5. In the West, the standard is a period of 7-8 years, which is quite reasonable, given the lower cost of credit resources.

The payback period is directly affected by several factors. Firstly, the total cost of the business, its scale - the more expensive the longer you have to wait. But then every month there will be a much greater return.

Secondly, the value of the lending rate - the higher it is, the faster business should generate income. Otherwise, bank deposits will become a more attractive alternative than buying a ready-made business.

The third factor is the rise in prices for real estate, land and, accordingly, the cost of rent. Land and real estate are becoming more and more expensive, their share in costs is increasing, which leads to an increase in expenses not related to business development, and therefore reduces overall profitability and lengthens the payback period.

The fourth defining moment is the turnover cycle. The shorter it is, the less working capital and funds are required to start and, therefore, the time to recoup the money. It is one thing to sell newspapers and magazines, and another to do construction and repair work. Although the profitability is almost the same.

In practice, the calculation is simple. Let's say your two outlets (standard kiosks) give 120 thousand rubles. net income per month. The kiosks are owned by you, but built on rented municipal land. They are not considered full-fledged real estate objects, they appear as temporary structures, and they will not let you buy the land under them, but they can be withdrawn at any time for city needs. Therefore, as an asset, they do not represent independent value. In this case, a reasonable selling price of your business, given the profitability and short turnover period, may be equal to the amount of profit that you receive in a period of one to two years - from 1.44 million to 2.88 million rubles.

The provisional principle is also followed by many large companies. For example, the Tander company, which owns a chain of stores retail"Magnet" adhered to the following tactics - opening a store in a new place, the company waited 4 months. If the store began to pay for itself, they left it. If not, closed.

By price entrance ticket or write a business plan

Estimating the value of a business depending on the payback period is, of course, convenient and simple, but it misses several important things that could increase its price. First, how much do similar offers cost on the market, and how much time and money would it take for a buyer to create and develop such a business on their own? It is possible that for you personally, thanks to connections in the mayor's office or equipment or premises bought on the occasion, the business cost much less and you developed faster. Selling based only on the payback period would be illogical. Therefore, it is useful to at least roughly estimate the cost of the "entry ticket" from scratch.

Calculate how much you would have spent by the time of the sale at current prices of money on rent, purchase of equipment, advertising, what would be the total amount of costs until the moment of the first profits. Simply put, draw up an approximate business plan, but taking into account your knowledge of all the nuances. Such an approach is called "costly" by independent appraisers.

A business plan, even the simplest one, will help you convince potential buyer in the prospect of buying your business. Try to take into account all your strongest points in this business plan for the client. competitive advantages. For example, your hairdressing salon employs the best craftsmen in the area, for the sake of which people come to you who are ready to overpay for quality. Or that you have the best imported equipment in the area for the production of bakery products or dumplings.

A good name is worth a lot

Surely you are not the only one who is going to sell a business like yours. Naturally, a potential buyer will compare all available offers, and most likely it will require the use of elements of the so-called "comparative" approach. The accuracy of the estimate depends on the quality of the collected data, since, using this approach, it is necessary to collect reliable information on recent sales of comparable properties.
This data includes: economic characteristics, time of sale, location, terms of sale and terms of financing. For example, it is one thing to sell a business for cash, another thing is to sell it on credit.

The effectiveness of the comparative approach is reduced if there were few transactions or a lot of time passed between them; if the market is in an abnormal state, as rapid changes in the market lead to distortion of the indicators. For example, a new head, a well-known lover of the redistribution of property, was appointed (elected) in a district or city. Or, as in Sochi, they decided to hold the Olympic Games.

In order not to suffer much with a comparative assessment of a business, you can resort to analyzing franchise offers similar to your profile, which indicate the requirements for a franchise buyer. The main one is the amount of investment for the business to operate and develop. Simply put, the franchisee is asking you to work with their technology, brand, style, and so on. The franchise can be sold to almost any type of small and medium-sized business: sushi delivery, travel agencies, restaurants, stamp shops and real estate agencies, etc. Type "franchise" or "franchise directory" into an Internet search engine and you will find hundreds of offers indicating the amount needed to start a business.

At the same time, the comparative approach allows you to focus on your individual characteristics, on the intangible assets created during your work. Western economists, and now Russian ones, use such a concept as "goodwill" (goodwill - good will).
Goodwill is essentially a combination of those elements of a business or personal qualities that encourage customers to continue to use the services of this enterprise or this entrepreneur, and which generate a profit in excess of that which comes from tangible as well as intangible assets that are subject to an accurate monetary value.

It is said to occur when you make a profit higher than the average in this area of ​​\u200b\u200bbusiness, that is, people are predisposed to buy from you.

Goodwill includes a favorable location, an established clientele, and the credibility of individual employees. This factor cannot be felt and calculated, but it is necessary to evaluate. Indeed, the development of any business is based on good relations, that is, the good will of sellers and buyers. And your task is to convince the buyer of your business that you have earned goodwill, and it is not in vain that he pays an additional 10-20 percent for a promising and promoted business.

When You Can't Do Without an Appraiser

Having fired a couple of arrows in the direction of the institution of professional appraisers, for the sake of truth it is worth noting that in practice there are moments when you simply cannot do without professional appraisers.

Firstly, in a dispute with the tax office over the market value of the object of sale and purchase in the form of real estate. For example, you bought a room for a workshop for 3 million rubles, and the tax authorities, in accordance with Article 40 of the Tax Code, having the right to control prices to determine the taxable base, they say - you, brother, underestimated the cost of the room and did not pay extra taxes.

This is where the conclusion of a professional appraiser helps in a dispute with the inspection, which will become an argument for setting the transaction price corresponding to the current market value. The opinion of a professional has the status of an official document and can be used in an arbitration court as convincing evidence in cases involving the determination of the completeness and correctness of the calculation and payment of taxes. In addition, sometimes it is beneficial to officially revalue the property of the enterprise downward, which helps to save on property tax.

The second category of partners of an entrepreneur, in relations with which the opinion of appraisers can be useful, are banks. By issuing secured loans, banks try to underestimate the value of the pledged property. Determining the real market value of the property by an independent appraiser makes it possible to establish a fair ratio between the value of the pledged property and the amount of the loan. In case of loan default official conclusion contributes to the prevention of disagreements between the parties to the transaction that arise when foreclosing the pledged property.
Professional appraisers are a great help even if you use the services of insurance companies. There are several hidden points that insurers prefer to remain silent about.

A case from one's life. The entrepreneur insured the warehouses he purchased for a fairly decent amount. But when the fire broke out, the insurance company offered a much smaller amount to be paid than was indicated in the contract, stating that, based on current legislation, the contract is void in terms of the excess of the sum insured over the actual (market) value of the property. It was of course impossible to determine in hindsight how much the burned warehouse cost. At the same time, the overpaid insurance premium was not returned to the entrepreneur.

If, at the time of concluding the insurance contract, the entrepreneur was armed with the appraiser's conclusion, there would be no problems - the examination carried out by an independent appraiser categorically does not allow the insurer to subsequently dispute the sum insured under the contract.

There are other times when professional valuation helps entrepreneurs. Among them, it should be noted the assessment of damage in the event of an insured event, as well as damage to the property of the entrepreneur or third parties. Knowing how much you really lost, you will be able to clearly justify your position in a controversial situation, including in a lawsuit.

D. Protasov, business consultant
Magazine "Modern Entrepreneur. Individual approach to business", N 3, March 2008

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 holders valuable papers whether the company will be able to fulfill its debt obligations in a timely manner, send 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 cost of equity only. 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 proportion total cost of the company being valued, which 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, whose financial statements are presented in dollars according to the IFRS standard.

To calculate free cash flow, you will need three reports: profit and loss statement, balance sheet and statement of movement Money. 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 profitability 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 equal to 10.1%, despite the fact that we will 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 forecasting all financial indicators needed 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 influencing 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 more than $800m and $700m, respectively, above the investment in last 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 the multiplier to the EBITDA parameter of the last year of the forecast period and discount, i.e. divide 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) at the price of a share, then 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.

Business Cost Factors

If a person is able to evaluate an apartment or a car himself, then when buying a business, you cannot do without a qualified appraiser. And the point is not only that special knowledge will be required here, but also that information about the state of affairs at the enterprise must be correctly extracted and correctly interpreted.
Ready Business Store believes that the main factor in determining the value of an enterprise is its net profit, and not accounting profit, but the money that the owner can withdraw from the enterprise.

1. “First of all, the buyer must pay attention to cash flows and net profit, - says Sergey Kharchenko, head of the valuation department of the Ready Business Store.

If there is no profit even in management reporting, it is worth considering.”

According to the observations of experts, there is a discrepancy between "white" and "managerial" accounting at absolutely all enterprises. Of course, firms tend to operate as legally as possible. But even the smartest ones manage to bring no more than 80% of their business “into the white”.

2. The second most important indicator that affects the value of a business, Sergey Kharchenko considers the period during which the business will bring money.

After all, products may lose their relevance, competitors may appear offering best product, lease agreements expire, or they plan to build an overpass on the territory of the production premises, as in the movie "Garage".

Business in leased areas is cheaper and “recovers” faster, but has more risks associated with the unreliability of the lease.

If the business is done on its own premises and equipment, then it is more expensive, it takes longer to “fight back”. But equipment, and especially real estate, are in themselves liquid asset. They can be sold with profit even in the event of a collapse of the business.

Intangible assets.

Experts differ in their assessment of such a phenomenon as goodwill - intangible assets of a company, consisting of a brand, business connections, employee talent, own know-how, etc.

For small businesses, of course, goodwill is not as significant as in large corporations that spend huge amounts of money on brand promotion.

The share of goodwill in the value of, say, a bakery is small, although there is still some - reputation, culinary skills, recipes.

But there are times when goodwill is a significant part of the value of the business. For example, the value of a firm developing software, fundamentally little depends on the rented space or own computers. In this case, the most important thing is bright minds, the names of developers and managers, as well as their connections.

In other words, the firm may not have large tangible assets, the book value of its property will be small, but it is able to generate significant financial flows. This often applies to information, consulting businesses. Such firms are worth much more than the totality of their assets.

The difference between the selling price of the firm and the price of its tangible assets is precisely the value of this very goodwill. The only catch is that it is extremely difficult to determine goodwill in any other way - except in the circumstances of the sale of the company.

Business staffing.

An important factor the formation of goodwill, the total value, and even the viability of the business is the workforce of the enterprise, its qualifications and manageability. The whole business can hang on one person, and this is a huge risk.

There is a well-known case in the insurance business when the chief sales manager left the company after a change of ownership, and 40% of customers, that is, almost half of the business, left with him. It was enough for him to start his own insurance company.

But it's not just about top managers who can switch to another concern and take away the clientele. No less serious problems are fraught with the whims of the chief car mechanic Uncle Vanya with golden hands, on which the entire car service business rests.

It's funny, but the fate of dry cleaning can be decided by a stain remover with a salary of 6 thousand rubles. The profession is very rare, and without such a specialist, dry cleaning loses both its meaning and customers.

Business valuation methods.

Appraisers use sophisticated methods, the essence of which is simplified as follows:

1. Market method - an analysis of similar transactions on the market is made, the necessary discounts-surcharges are made depending on the specific circumstances of the business, and thus the value of the enterprise that you want to buy is determined.

This is the method that everyone uses when buying a house or a car - to start from the prices of a similar product on the market.

2. Recovery method - the business is valued at the amount that would be required to develop a similar business from scratch.

3. Income method - in this case, the income that the enterprise gives or will bring is considered.

Here, the assessment is influenced by the period for which you can "recapture" the funds invested in the purchase. Now normal for a small business is the payback period of the acquired enterprise, equal to one and a half years.

No one will sell a working business for less than a profit of 7-8 months.

It is rare that a business sells for more than two or two and a half annual profits.

According to the manager of the investment banking department of the investment holding "FINAM" Alexander Butov:

first of all, the value of a business is determined by the position of the enterprise in the market and its revenue
followed by profitability and accounts payable
the factor of profitability is important - the forecast of cash receipts for the future and the period for which the acquisition can pay off.

But in practice, - says Alexander Butov, - buyers often use their naive method: the proceeds are multiplied by profitability and by the number of years for which the new owner wants to recoup the deal.

For some reason, three years is considered normal.

The procedure for transferring “ownership of the business”.

The most delicate and difficult question is how to give money and take ownership of a new business. I really want there to be no too great or even insurmountable distance between these two acts.

It must be said that there are indeed risks, including criminal ones. There are risks of non-compliance with agreements, swindle - some intermediary firms even offer physical security services to customers. But, as the experience of recent years shows, machinations in this area are becoming less crude and more elegant.

The general trend is that everyone tries not to violate the law, especially the criminal one. Which, however, requires even more diligence from intermediary consultants who monitor the purity of the transaction.

Sergey Samsonov, director of the legal department at the Ready Business Store, lists the following as the main risks:

Hidden off-balance sheet liabilities of the company being sold.

With some sales schemes, old debts that the previous owner managed to hide - for example, promissory notes not taken into account on the balance sheet, some guarantees, guarantees - may come out after the transaction. And the new owner will not get away from them;

The risk of non-fulfillment of obligations under a business sale and purchase transaction, that is, non-payment of money or non-receipt of rights to a business, with a competent intermediary with a good reputation, in principle, is minimized.

A normal intermediary examines the credit history of the enterprise, collects information from the field of security. He is usually responsible for all documentation related to the appraisal, because he must have an appraiser's license.

In some cases, the intermediary may, by agreement with the parties, undertake financial guarantees upon the fact of the transaction, but this is extremely rare.

Money transfer procedure.

1. First, an agreement of intent is signed between the buyer and the seller, then the buyer hands over to the seller against receipt or makes an advance payment to his account.

2. After that, all the declared circumstances of the business are checked.

3. When the decision is made, the buyer opens a letter of credit in favor of the seller.

4. Then a contract for the sale of a 100% share or shares is signed, depending on the legal form of the enterprise.

5. The bank admits the seller to the funds of the letter of credit only on the basis of a signed and certified sale and purchase agreement and registered in tax office new founding document.

Sometimes, instead of a letter of credit, the buyer rents a safe deposit box, which is used for payment through the same mechanism: the bank opens the seller's access to the box when the buyer hands over documents certifying his right to own the business.

Transferring money is easy.

Purchase and sale procedure

From a legal point of view, there are four forms of buying and selling a business.

1. The first and main one is the replacement of the founders in an LLC or in a CJSC - as in a legal entity that owns a business. This is a fairly simple way.

Its disadvantage is that the legal entity retains its old credit history under the new owner.

Unknown off-balance sheet liabilities may surface.

There is also a significant plus: the replacement of founders does not require obtaining the entire package of permits, licenses, if the business is licensed.

It is only necessary to register changes in the composition of the founders in the tax office.

Business, as it were, remains untouched, with its pluses and minuses. It's just that the founders and owners are different people.

2. The second way is the creation of a new legal entity and the transfer of assets associated with the purchased business to it.

Assets can be both sold and transferred in another way.

When selling property from one legal entity to another, taxes naturally arise, which, however, can be minimized. The method is also simple, but also has a significant drawback.

The new legal entity must re-obtain the entire set of permits and licenses, if required. And this is a very tricky business.

According to experts, a couple of years ago it took three weeks to receive all the documents for a beauty salon. A year later, it took five weeks. Now it's almost three months. These are the results of the campaign announced just two years ago to combat administrative barriers. Three months ready-made enterprise will be idle, and incur losses for no business reason. Due to bureaucratic harassment.

Knowing the situation, the intermediary-consultants proceed as follows. They create a legal entity ahead of time and receive all the necessary documentation for it. This keeps downtime to a minimum. But in some cases, two permits for one case cannot be obtained, you have to disavow the old one first, and then wait for the new one.

3. The third form proposed by the law is the sale of an enterprise as a property complex. But there are few such cases when an enterprise would be registered as a property complex.

On the contrary, often on one legal entity “hang”, for example, a car wash, two restaurants and a gas station, and only the gas station is sold.

Business purchase and sale transactions under this option are extremely rare. Although experts consider this method to be optimal, it practically removes all the risks described above associated with hidden off-balance sheet obligations or the need to obtain a bunch of new permits.

The three methods described are suitable for the sale of normally functioning enterprises. 4. There is a fourth - for the endangered. This is a sale through liquidation. We are talking, of course, about friendly bankruptcy. Relatively speaking, the buyer and the seller agree, the seller initiates the procedure for the liquidation of the enterprise, its property is described, sold at auction, where it is acquired by the new owner.

True, there is a risk that another bidder will come and beat the price. But experts say that if everything is done correctly, then the transition of the business to the right buyer is guaranteed. This mechanism is suitable for small business, and for medium, and for large.

Why intermediaries are needed

The most important thing in this area is consultations, evaluation, information, support. No sane investor would buy a business based on their own ingenuity.

The dating factor for Russian business remains very important. And the buyer and the seller often need the recommendations of third parties who are personally familiar with the parties.

A fairly large proportion of transactions go through without it. That is, a normal market situation becomes common, when the seller and the buyer initially do not know anything about each other.

The middleman brings them together, helps with presales, often acts as a business consultant, and helps clean up the business.

He also evaluates the enterprise, makes inquiries about the high contracting parties in the interests of each of them, provides legal support and sometimes even solves security issues.

The services of an intermediary consultant cost 2-15% of the transaction amount - all intermediaries emphasize that their approach is purely individual. And the seller pays for them.

The fact is that sales are made from the set of offers that is formed by the sellers, and therefore the intermediary has to be paid. However, no one prevents the buyer from paying for the services of an intermediary.

Taxes should also be included in the transaction costs. A smart intermediary, of course, will help to minimize them. By itself, the fact of buying and selling a business is not an object of taxation.

Taxes arise if property is transferred during the transaction. Or if the business was sold by buying shares or shares and the purchase price exceeded the face value - this difference is considered the income of the seller and is subject to income tax - 13%, if we are talking about individual.

It is clear that in the case of an LLC, a 100% share of an enterprise can be valued at 10,000 rubles at the nominal value of the authorized capital, but a business can cost $100,000. That is, the difference between the face value and the market price will be $99,700 and should be taxed as the income of the seller.

Often, the parties take legal risks by lowering the formal value of the business, or agree to share the burden of taxes.

Now there are dozens, and even hundreds of proposals for the sale of a business on the market. Not only factories and steamships are for sale, but also small enterprises that can be managed by an ordinary person with at least some business sense.

This market may also be of interest to existing entrepreneurs who want to diversify their business.