Many people wonder how to evaluate the value of a business. There are many ways to do this. And in this review we will highlight some of them.
Using the capital market method
The process of evaluating entrepreneurial activity using the method capital market includes such basic aspects as:
- The procedure for collecting all the necessary data.
- Selection of a peer organization.
- Analysis of the financial part.
- Calculation of estimated multipliers.
- Selection of a certain magnitude of the multiplier.
- Determination of the final cost.
It is necessary to consider in more detail each of these stages, which will make it clear how to assess the value of the business.
Data collection and search for a peer organization
By collecting the necessary data is meant the receipt of such information that will clarify the issue of the actual value of transactions with shares similar to the securities of the enterprise being evaluated. You also need to find out all the necessary data on the statements of the organization that is being evaluated. All indicators must be compared with peer companies. It should be noted that the quality of the received data will strongly influence stock valuation using the capital market method.
How to evaluate a business by analogy? A selection of peer organizations is considered a key point in applying this approach. The main difficulty is that in many situations it will be necessary to compare those objects that, in principle, are not comparable with each other. To complete this stage, you need to familiarize yourself with some criteria. They are as follows:
- Industry affiliation.
- Products that are manufactured at the enterprise.
- The final assortment.
- Production volumes.
Parameters that affect the reduction of the list of analogues
After this, the primary list is narrowed due to the fact that some companies refuse to provide all the necessary information. Also, a decrease in the list may occur due to the introduction of refinement parameters for comparison. Among them are:
- The level that is characteristic for diversification of production.
- Market specific position.
- Size and nature of competition available.
- Prospects for enterprise growth.
- Economic risk.
- The quality level of management and more.
The first steps towards evaluating entrepreneurship
To answer the question of how to evaluate the value of a business, you need the financial analysis. By it is meant a rather important device with which you can determine the comparability of peer companies.
It is through the use of such analysis that it is possible to determine the rating of the evaluated company in the list of similar companies. At this stage, there is a check of the ratios of borrowed funds, assessment of working capital. It is also necessary to check all reporting for comparability and analyze all the coefficients.
At the next stage, in searching for an answer to the question of how to evaluate the value of a business, it is necessary to determine what type of multipliers to be evaluated is optimal for evaluating the entire organization as a whole. A multiplier is a coefficient that reflects the ratio between such parameters as the price of a business and financial indicators. In practice, two types of multipliers are usually used: interval and moment.
What to consider?
When calculating valuation multiples, it is necessary to determine the value of shares for all enterprises that were selected as similar. At this stage, it will be possible to calculate the financial base for a specific point in time or at the time of the assessment.
In order to conduct an analysis, you can use several multipliers at once and calculate several cost parameters at once. The choice of a specific parameter will depend entirely on a specific situation.
In order to determine the final value of the cost, it is necessary to choose a certain value of the multiplier, weigh all the intermediate results and make the final adjustments.
The most time consuming step in evaluating
The most difficult step in finding an answer to the question of how to evaluate the value of the company is considered to be the choice of a certain magnitude of the multiplier. It must be carefully justified and recorded in all reports on the valuation of shares of the enterprise. Due to the fact that there are simply no identical enterprises, the range of values for the same multiplier can be simply huge.
In such a situation, it is necessary to cut off all extreme values and begin to calculate the average parameter for the group of analog companies. After this, there is a need for financial analysis. By the value of the final parameter obtained as a result, the position in the general list of the organization that is being evaluated will be determined.
Each multiplier has its own weight depending on certain information, on the degree of trust, on the objectives of the assessment and on specific conditions. As a result of weighing all this, the final value characteristic of the stock price of the enterprise will be obtained. This parameter can be taken as a basis for further adjustments.
The final valuation of the company will require accounting for those non-productive assets that are available. In addition, if, based on the results of the financial analysis, a deficiency of working capital or an urgent need for investments was found, then the obtained value should be deducted. You can also take advantage of liquidity discounts.
As you can see, such a method is very complex and laborious to use. All the results that will be obtained are completely dependent on the study of a large number of similar companies. And this must be taken into account in evaluating your business.
What is the essence of the sales method?
How to evaluate the value of a business for sale? To evaluate your own company, you can also use the sales method, which is based on the cost of acquiring an analog company or its controlling stake.
The main distinguishing characteristic that the sales method has, in comparison with the valuation method described above, is the type of initial price data. In other words, the sales method uses a parameter such as the cost of a controlling block of securities, rather than the price of only one share. Accordingly, using this method, you can answer the question "how to evaluate the business during the sale."
Consideration of the company from the position of the property complex
You can use the costly approach to assessing entrepreneurial activity. In this case, the organization will be considered from the position of the property complex, which is necessary for the implementation of any business activity.
The structure of the enterprise will include absolutely all varieties of property that are intended for profit. We are talking about land, buildings, structures, equipment, goods, debts and more. Using this method, you can answer the question "how to evaluate business performance."
The essence of this method lies in the fact that in the first place there is an assessment of all the assets of the company.After that, from the amount of money that was received, it is necessary to subtract the current value of those obligations that are characteristic of the company. As a result, a parameter will be obtained that fully demonstrates the value that characterizes the equity of the company being evaluated. For calculations, it is worth using the company's balance sheet data at the time of the assessment.
The main advantage of this method is the use of reliable evidence about the state that is characteristic of the property complex of the enterprise. Among the shortcomings, one can single out the factor that does not take into account the future capabilities of the enterprise in making a profit. In addition, some methods have high complexity and complexity in their use.
However, regardless of all these shortcomings, the costly method of evaluating a company is most relevant in a transition economy. Especially when compared with profitable and comparative methods.
How to evaluate a company that needs to be liquidated?
How to evaluate a business if liquidation or bankruptcy is planned? Should use the method residual value. It can also be used in a situation where there are serious doubts that the company is capable of making high profits. Under the liquidation value is meant the net profit that the owner of the company is able to obtain in the event of the liquidation of the enterprise and the closure of entrepreneurial activity, as well as the separate sale of all assets and when settling with creditors.
Through the use of such a method, one can obtain a minimum estimation parameter. In addition, using this approach, you can determine the level of value of entrepreneurial activity, which is the lowest.
Conclusion
In this review, as an example, some methods that are used to evaluate a business were given. Naturally, there are a lot of such methods. And they are all used in a variety of situations. In addition, the entrepreneur chooses the approach that is most optimal for his situation. I hope this review helped to understand how complicated and time-consuming the process of evaluating a business is.
