When determining the value, the appraiser takes into account various micro and macroeconomic factors, which include the following.

Demand. Demand is determined by consumer preferences, which depend on what kind of income this business brings to the owner, at what time, what risks it entails, what are the possibilities of control and resale of this business.

Income. The income that the owner of an object can receive depends on the nature of the operating activity and the ability to make a profit from the sale of the object after use. Profit from operating activities, in turn, is determined by the ratio of income streams and expenses.

Time. The time of receipt of income is of great importance for the formation of the value of an enterprise. It is one thing if the owner acquires assets and quickly begins to make a profit from their use, and another thing if investment and return of capital are separated by a significant period of time.

Risk. The value is inevitably affected by risk as the probability of receiving expected future income.


Control. One of the most important factors affecting value is the amount of control the new owner has.

If an enterprise is purchased as an individual private property or if a controlling stake is acquired, then the new owner receives such significant rights as the right to appoint managers, determine the amount of their remuneration, influence the strategy and tactics of the enterprise, sell or buy its assets; restructure and even liquidate the enterprise; make decisions on the takeover of other enterprises; determine the amount of dividends, etc. Due to the fact that large rights are purchased, the cost and price will usually be higher than in the case of the purchase of a non-controlling interest.

Liquidity. One of the most important factors influencing the valuation of an enterprise and its property is the degree of liquidity of this property.

The market is willing to pay a premium for assets that can be quickly converted into cash with minimal risk of losing some of their value.

Hence, the cost of closed joint stock companies should be lower than the cost of similar open companies.

Restrictions. Enterprise value reacts to any constraints the business has. For example, if the state limits prices for an enterprise’s products, then the cost of such a business will be lower than if there were no restrictions.

The relationship between supply and demand. The demand for an enterprise, along with its usefulness, also depends on the solvency of potential investors, the value of money, and the ability to attract additional capital on the financial market. An investor's attitude to the level of profitability and degree of risk even depends on age. Younger people tend to take more risks for higher returns in the future.

An important factor influencing the demand and value of a business is the availability of alternative investment opportunities.

Demand depends not only on economic factors. Social and political factors are also important, such as public attitudes towards business and political stability. Supply prices are primarily determined by the costs of creating similar enterprises in society. The number of objects offered for sale is also very important. This affects income.

The choice of solution for both the buyer and the seller depends on the development prospects of the given business. Typically, the value of an enterprise in a pre-bankruptcy state is lower than the value of a financially stable enterprise with similar assets.

The estimated value of any property is affected by the relationship between supply and demand. If demand exceeds supply, then buyers are willing to pay the maximum price. The upper limit of the demand price is determined by the current value of future profits that the owner can receive from owning this enterprise.

This is especially true for industries in which supply is limited by natural resources. It follows that prices for raw materials enterprises will be closest to the maximum limit in the event of demand exceeding supply. At the same time, if demand exceeds supply, new enterprises may appear in some industries, which will lead to an increase in their number. In the long term, prices for these enterprises may fall slightly.

If supply exceeds demand, then prices are dictated by the manufacturer. The minimum price at which he can sell his business is determined by the costs of creating it.

So, the main factors determining estimated value, are:

• demand;
• profit of the business being valued, present and future;
• costs of creating similar enterprises;
• the ratio of supply and demand for similar objects;
• income risk;
• the degree of control over the business and the degree of liquidity of assets.

The main factor influencing the price of a business is, undoubtedly, the income generated. This refers to net income or so-called entrepreneurial income, that is, the amount that the owner of an enterprise receives monthly after paying all taxes, wages and other mandatory payments.

An important factor is whether the company has its own real estate. If the enterprise is sold together with the real estate it owns, its price is equal to the amount of income for 2-5 years. If the enterprise operates on rented premises, its price is the amount of income for 0.5-1.5 years; in exceptional cases, the price may be equal to the amount of income for 1.5-2.5 years.

You should also highlight the following main factors influencing the price:

1. Type of business. Those enterprises that do not require special skills to manage are more expensive than highly specialized companies whose sales market is limited.

2. The presence of assets that are decisive in obtaining net income. These include the availability of specialized equipment, a customer base, trained personnel, etc.

3. The relationship between supply and demand. The price of an enterprise will be significantly higher if it operates in an area in which the number of competing companies is small and there is stable demand.

4. Presence of risks. For example, an enterprise working with “white” accounting will cost more than the same enterprise working with “gray” accounting, although its income will be significantly lower.

5. Sales motivation. You should always pay attention to the reason for selling a business, because it is possible that the company is being sold because a serious competitor has entered the market.

Other important factors influencing the cost of a business include the company’s fame, business reputation, guarantee of maintaining a customer base, etc.

In accordance with the established goals and sources of income, we select the group of business value types we need:

1. Enterprise value by assets. The types of value in this group assume that the enterprise will be liquidated. We will receive a one-time income from the sale of elements (assets) of the enterprise.

2. Cost of an operating enterprise. The types of value in this group assume that the enterprise continues to operate and make a profit. We will receive income from the firm's performance over a period of time.

Any type of business value, regardless of which group it falls into, represents the current value of the expected future stream of income (profit) from using the enterprise in one way or another. Here are the most commonly used types of business value:

· Liquidation value is the market price for the sale of the company's assets minus debt obligations and costs of sale. Belongs to the 1st group of cost types.

· Replacement cost – the cost of recreating an enterprise with a similar asset structure. Belongs to the 1st group of cost types.

· Book value – the difference between the value of assets and the amount of debt obligations (according to balance sheet data). Belongs to the 1st group of cost types.

· Market value – the current market value of an already completed transaction. It can reflect both the 1st and 2nd groups of types of value.

· Reasonable market value is the most probable price at which we can sell the enterprise. Belongs to the 2nd group of cost types.

· Investment value – the reasonable value of the enterprise for a specific intended buyer. Takes into account the increase in profit from the new owner’s use of his know-how, technologies, reorganization plans, etc. Belongs to the 2nd group of cost types.

25 Return on assets: essence, indicators and methods of analysis.

Return on assets is an indicator of the efficiency of an enterprise's operational activities. It is the main production indicator and reflects the efficiency of using invested capital. From the point of view of accounting, this indicator connects the balance sheet and the profit and loss account, that is, the main and investment activities of the enterprise, therefore it is very important for financial management (we will consider the types of activities of the enterprise in detail in the next chapter).

Financial leverage (leverage).

This indicator reflects the structure of capital advanced into the activities of the enterprise. It is calculated as the ratio of the entire advanced capital of the enterprise to the equity capital.

Advance capital,

Own capital.

The level of financial leverage can be interpreted, on the one hand, as a characteristic of the financial stability and riskiness of a business, and on the other hand, as an assessment of the efficiency of the enterprise’s use of borrowed funds.

Before moving on to factor analysis itself, we will make a number of important reservations regarding the scope of application of the DuPont model.

When analyzing return on equity in the spatiotemporal aspect, it is necessary to take into account three important features of this indicator, which are essential for formulating valid conclusions.

The first is related to the temporary aspect of the activities of a commercial organization. The return on sales ratio is determined by the performance of the reporting period; it does not reflect the probable and planned effect of long-term investments. For example, when a business organization makes a transition to new promising technologies or types of products that require large investments, profitability indicators may temporarily decrease. However, if the strategy was chosen correctly, the costs incurred will pay off in the future, and in this case, a decrease in profitability in the reporting period does not mean low efficiency of the enterprise.

The second feature is determined by the problem of risk. One of the indicators of the riskiness of a business is the financial dependence ratio - the higher its value, the more risky the business is from the position of shareholders, investors and creditors.

Thus, it is necessary to take into account the relationships between factors that are not directly reflected in the DuPont model. For example, based only on the mathematical formula of the model, it may seem that an infinite increase in financial leverage will lead to an equally infinite increase in return on equity. However, as the share of borrowed funds in the advanced capital increases, payments for using loans also increase. As a result, net profit decreases and return on equity does not increase. In addition, one cannot ignore the financial risk that accompanies the use of borrowed sources.

The third feature is related to the problem of evaluation. The numerator and denominator of the return on equity ratio are expressed in monetary units of different purchasing power. Profit is a dynamic indicator; it reflects the results of operations and the current level of prices for goods and services, mainly for the past period. Unlike profit, equity capital accumulates over a number of years. It is expressed in an accounting estimate, which may differ greatly from the current market value.

In addition, the accounting estimate of equity does not reflect the future earnings of the enterprise. Not everything can be reflected in the balance sheet; for example, the prestige of a company, a trademark, the latest technologies, and highly qualified personnel do not have an adequate monetary value in the reporting (unless we are talking about the sale of the business as a whole). Thus, the market price of a company's shares may greatly exceed its book value, in which case a high return on equity does not mean a high return on the capital invested in the company. Therefore, the market value of the company should be taken into account.

The purpose of the DuPont model is to identify the factors that determine the efficiency of a business, to assess the degree of their influence and the emerging trends in their change and significance. This model is also used for comparative assessment of the risk of investing or lending to a given enterprise.

All factors of the model, both in terms of significance level and change trends, are characterized by industry specificity, which the analyst must take into account. Thus, the resource productivity indicator may have a relatively low value in high-tech industries that are capital intensive; on the contrary, the profitability indicator of economic activity in them will be relatively high. A high value of the financial dependence coefficient can be afforded by firms that have a stable and predictable flow of money for their products. The same applies to enterprises that have a large share of liquid assets (trade and distribution enterprises, banks). Consequently, depending on the industry specifics, as well as the specific financial and economic conditions prevailing at a given enterprise, it can rely on one or another factor to increase the return on equity.

Related information.

The essence and necessity of business valuation

Business – this is the specific activity of an organization and individual persons, organized within the framework of a defined country. The owner can sell it, mortgage it, insure it, bequeath it. THAT. A business object of a transaction with all the characteristics of a special kind of product. Business valuation can be considered. from 2 positions:

1.process (distribution of objective.market.st-ti pre-I);

2.result (market price - probable price of property)

Article rating – this is a complete picture of the real size of a given object. Target business valuations:

1)increase current I am in charge.

2)definition of price standards

3) definition of article before in case of purchase and sale

4) restructuring of the pre-I

5) for insurance

6)for taxation

The need to evaluate the item arises in the following cases:

1. Sale of property, part of the property

2.Liquidation

3.Purchase and sale of shares, share, deposit

4.Leasing

5. Obtaining a secured loan

6.Insurance

7. Definition of tax base

8. Privatization, etc.

Types of business value

Market article

Applicable in matters with the federal government. and local taxes. Market st-t def for the assessment of purchase and sale pre-i. Yavl. objective and independent of the wishes of the participants.

Investment

Article before for specific purposes. An investor or group of investors. It is being built simultaneously/in parallel with the issues of capital and profit.

Liquidation

Or the value of a forced sale is the amount of money that is actually received from the sale of property in a too short period of time, when it is not possible to carry out marketing in connection with the specific market situation.

Collateral

This is a pre-market assessment for lending purposes.

Balance sheet

Reflection costs of construction or acquisition of property. Has its own ratings: initial. article and will restore. art.

Factors influencing the cost of business valuation

To objectively assess the value of an enterprise, it is necessary to know the factors influencing it and take them into account in the valuation activities. All these factors can be combined into two groups: external and internal.

External factors include: the state of the national economy and its development trends; political and social situation in the country; investment attractiveness in the country; inflation rate; economic and social plans of the state for the future, etc. Thus, external factors are related to the specific situation at the macro level and the trend of its change.

Internal factors are related to the current situation at the location of the enterprise being assessed. These include: the ratio of supply and demand; investment attractiveness of the enterprise being valued; investment attractiveness of the region; investment risk, liquidity of the company being assessed; the degree of control of the investor (owner) over the acquired enterprise; present and future profit of the business being valued, etc.

Depending on how factors influence the assessment of the value of an enterprise, all of them can be divided into two groups, positive and negative.

Positive factors are those factors that positively affect the valuation of the enterprise, and negative ones - negatively.

For example, positive factors include the outpacing of demand over supply, the acquisition by the owner of full control over the purchased property; high future income from acquired property; low investment risk, etc.

Negative factors include the low investment attractiveness of the region in which the enterprise is located; weak management at the enterprise; supply outstripping demand; high investment risk, etc.

Scientists have been working on the patterns of risk-return relationships for several centuries. In general, the problem has not been solved. However, many methods for analyzing profitability and the corresponding risks have already been developed and well described. Some of these techniques are quite simple, while others require serious mathematical training.

You do not need to do complex mathematical modeling on your own: specialists will help if necessary. But a risk manager needs to navigate the set of methods they offer. It is from the point of view of a practicing risk manager or an ordinary manager that we would like to talk here about the concepts and methods of measuring and analyzing risks and income.

The risk-return relationship ultimately determines the risk-value relationship of the firm. At the end of the last century, there have been more than once discussions about what business is striving for. It is clear that it means profitability, since without it the company will die very soon. But not only that. A healthy company strives to strategically improve the well-being of all individuals and organizations interested in its fate. Indicators of the fundamental possibility of this are the value of the company and the quality of its existence.

So, the firm seeks to strategically maneuver its value. Risk is sought to be managed to facilitate and secure the execution of the strategy. Therefore, risk management efforts and firm value are positively related. This does not mean that the more money you spend on risk management, the more expensive your company will be. Sometimes it’s even the opposite: overspending on any management or support activities can create additional problems for the company. But in general, we can recognize the dependence of the value of a company on its risk position.

The answer to the most important question depends on the ratio of riskiness and potential profitability: how much is the company worth? There are about one and a half dozen assessment methods. Each of them has its own purpose. None of them provide a definitive, undisputed assessment.

The more expensive a company is valued by the market and the more stable this valuation is, that is, the more favorable the ratio of profitability and riskiness, the higher the economic well-being and peace of mind of its owners. So, one of the fundamental questions to the science and practice of risk management is: how much does the company cost?

The answer to this question depends on the perspective from which the firm is assessed. The welfare of its owners is sometimes achieved in unexpected ways, for example, by selling the company. Estimating its value depends on many factors. There was even a special profession called “commercial property appraiser”, which in recent years has quickly been introduced into Russian business practice. In addition, independent assessment exists as a developed business of consulting firms.

The value of a firm depends on what the valuation is for. The author of the most fundamental work on this topic (Pratt S. P. Valuing a Business., 1998) believes that there is no universal methodology here. The more precisely the purpose of the assessment is defined, the more successful the project for which it was carried out will be. An assessment of the value of a company can be carried out in the following cases, each of which has its own risk specifics, with:

• assessing the value of a gift, fortune, estate for tax purposes;
• substantiation of plans for the participation of the company’s employees in its share capital;
• purchase and sale of a company, its part or a block of its shares;
• transfer of the enterprise for rent;
• reorganization of a company or implementation of an investment project for its development;
• liquidation of the company;
• mergers and separation of companies;
• financial takeovers and reconstruction of ownership of the company;
• applying for a bank loan secured by the company’s assets;
• divorces;
• concluding insurance contracts;
• occurrence of insured events;
• declaring bankruptcy;
• issuance of new shares and other securities;
• insurance of company valuables in anticipation of losses;
• transfer of the company into trust management.

The value of a company has several types, the value of which can vary significantly, accordingly changing the risk indicators when making decisions about the operation of the company and its investment:

1. fair market value, i.e. the value accepted by government agencies, equally beneficial to both small and large shareholders and close to the average market value of similar objects;
2. investment cost, i.e. the value of the company for a given investor with all his plans, preferences, tax features, possible synergies and restrictions;
3. Intrinsic or fundamental value, defined as the value derived from a careful and concerted examination of all firm characteristics and market factors;
4. the value of a continuing business at which the appraiser believes the firm will continue to operate indefinitely;
5. liquidation value, i.e. the sale value of assets in the event of termination of the company's activities;
6. balance sheet, or accounting, value, obtained on the basis of accounting documents about the company's assets and its liabilities;
7. real market value, i.e. the price for which a company can be sold within a reasonable time on the currently available market.

It should also be borne in mind the differences that exist between firms of different legal forms: private firms are valued differently than small joint-stock companies, and differently than huge corporations whose shares are constantly traded on stock exchanges.

What is especially important to financial analysts, risk managers, and most investors is the intrinsic value of a firm's shares, since owning shares is owning the firm. When calculating intrinsic value, the analyst tries to be realistic, without over or underestimating his estimates regarding the real market conditions of supply and demand for shares. The following must be taken into account factors that can affect their cost:

• The value of the company's assets. The company owns various assets that can be sold, and the proceeds from the sales are distributed among the shareholders. When assessed from the perspective of a continuing business, this value is usually not taken into account unless the company is found to have assets that are not needed to continue its main production. But even in this case, the excess is sold, and then the company is appraised, although it is not always possible to sell the excess assets within the limited time frame of the project for which the appraisal is being made. In the latter case, this part of the assets is included in the assessment.
• Probable future interest and dividends. If a company must pay interest on a previously taken out loan or has already announced the payment of dividends, this affects the price of shares.
• Probable future earnings. This is the basis of assessment, the most powerful factor.
• Probable future growth rate. If a company has a bright future of strong, fast and sustainable growth, then its shares will definitely go up.

Intrinsic value is calculated to compare it with the current market value or the price a serious buyer would offer for the firm. The main task of the analyst and risk manager is precisely to detect inconsistencies in this series in order to use them profitably when buying and selling a company or to draw the attention of management and owners to the dangers of financial takeover or bankruptcy.

Situations of undervaluation and overvaluation of a company by the market are temporary, so any assessment remains correct only for some time, the duration of which is unknown. Sometimes the market immediately reacts even to rumors about a particular company, and sometimes it does not recognize even very promising changes in companies for a long time. Why? This is one of the problems to which financial science has not yet found a clear answer.

The method for calculating intrinsic value does not always work correctly due to the following main reasons:

• The market is imperfect; it does not always immediately and adequately respond to changes in companies.
• There are companies whose success depends heavily on speculative factors and luck, and not on the depth and thoroughness of calculations. These are some types of trading.
• Some firms grow rapidly, and this growth is difficult to predict and estimate because it is influenced by factors such as fashion. You can remember the boom in sales of the Rubik's cube and the Tamagotchi electronic toy (The whole world seemed to have gone crazy for them. And why would it be?)
• New products, technologies and sectors appear in the market from time to time. The economic parameters of these phenomena have not been amenable to formal analysis for some time.
• Sometimes the market experiences “Black Tuesdays, Thursdays or Fridays”, when stock prices of the entire market simply fall into the abyss for no apparent reason (the good thing is that these periods are relatively short, although unpredictable).
• It is not always easy to include cyclical fluctuations in the economy in a rational analysis (these phenomena are too multidimensional and complex).
• Revolutionary upheavals in some countries can shake and even change the structure of the market.

One way or another, the financial benefits and risks associated with owning a company or part of it (shares) come from the following: sources:

1. Revenues or cash flows from major operations.
2. Income or cash flows from investments (interest on purchased debt instruments or dividends from mutual instruments).
3. Proceeds from the sale of assets.
4. Proceeds from pledge of assets.
5. Sale of shares.

Key Financial Variables when estimating the magnitude of these sources:

• profits (income);
• cash flows;
• dividends or ability to pay dividends;
• earnings;
• revenue (receipts);
• assets;
• cost of capital (level of bank interest rates).

In some cases, the specifics of the transactions being assessed and other additional circumstances may significantly affect the result. Among these factors:

• the size of the block of shares from the positions and in whose interests the company is assessed (controlling, dominant, significant, small);
• the right to participate in management (voting rights);
• the ability to easily, quickly and without significant losses sell shares, their liquidity, i.e. the presence of an equipped and active market for them;
• legislative restrictions on transactions with shares (by the size of the transaction, by the right to a controlling stake, antimonopoly rules, restrictions on making certain types of decisions, restrictions on the rights of foreigners, etc.);
• restrictions on property rights;
• restrictions on changing the main activity of the company, etc.

Methods for estimating the value of a company

The list of methods for valuing companies is quite long. Let us briefly describe the essence of each of them.

Self-sufficiency method

Buyers evaluate how much a given company can service as debt if purchased with borrowed funds. Sellers use this method to calculate the maximum price that the cash flow generated by the company can support.

The logic of the method is as follows: the company will produce a cash inflow of X rubles, available to pay for borrowed capital. This way, the buyer can borrow the capital needed, pay it back within a reasonable time frame, and then profit from the business. This means that the amount of borrowed capital is approximately equal to the price of the business.

The calculation is made as follows. Forecast proformas of cash flows are drawn up for 7-10 years (or less - it all depends on the average payback period of capital investments in a particular industry and country). Outflows to maintain the business in working competitive condition are subtracted from the forecasted flows. The result will be a forecast of average cash inflows for maintenance and return of borrowed capital.

On this basis, the amount that can be borrowed from the bank against this cash flow is calculated. Taking into account that the loan cannot exceed 75-85% of the total project amount, the total cost of the company is calculated.

Discounted Cash Flow Method

It is necessary when: the purchase of a company is considered as an investment and they are going to resell it in a few years; a company is bought with borrowed funds for the purpose of quick liquidation or resale; The company operates in a high-risk environment.

The calculation is made as follows. A cash flow forecast is drawn up for the entire period that the buyer intends to keep the company in his ownership. Business maintenance expenses, taxes and debt service expenses are deducted annually. The remaining yearly amounts are then discounted to the current number and added together. The resulting amount is added to the residual value of the assets expected at the end of the holding period and subtracted from the expected liabilities at that time. The result is close to the firm's price on the valuation date.

Income Stream Capitalization Method

Applies to firms that produce sufficiently large after-tax income to qualify as a "good name" that exceeds the value of the firm's assets. An “updated” forecast income statement is prepared for the next 12 months. Net operating income after taxes is divided by the required return that a potential investor would expect from any investment at that level of risk. All obligations of the company assumed by the new owner are subtracted from the result. The result is equal to the value of the firm.

Superior Income Method

Calculated to evaluate any profitable company. It is assumed that she is worth as much as her assets are actually worth, plus her “good name” if her income is high enough.

Economic value of assets method

This method is suitable for companies that are not particularly profitable, for companies with declining profitability, and also in cases where selling the company in parts is more profitable than its current operation. Independent experts estimate the real liquidation value of each asset separately, and the results are added up to form the price of the company.

Accounting estimate of net worth

Rarely used. The price is determined by subtracting the amount of the firm's liabilities from the amount of its assets. This assessment is needed as an additional argument in negotiations.

Tax Service Method

Used primarily to determine taxes on gifts, inheritances, etc. "Intangible assets" and liabilities are subtracted from the firm's assets. An additional stream of income from the “good name”, capitalized at the industry average “normal” rate, is added to the result.

Comparable transactions method

It is used when there is reliable data on sales of similar companies, the financial documentation of which is available for analysis and verified by independent experts. Past transactions are compared to the firm being valued, and item-by-item adjustments are made to answer the question of how much the firm would be worth if it were sold in the same way as its peers.

Price/income multiplier method

Mainly required for large joint stock companies whose shares are traded on the stock exchange. A number of similar companies are being selected. The ratio of the price per share of the market price of shares to earnings per share is calculated, and then the average value of these ratios. The after-tax net income generated by the company being valued is multiplied by the resulting average p/e ratio to give a version of the firm's price as the total price of all its shares.

Reimbursement approach

Used only for insurance purposes under the terms of a contract for full compensation of losses from an insured event. An independent expert (necessary because the concept of “full recovery” is not particularly clear) estimates the cost of restoring the business at current prices.

Industry simplified approaches

In some traditional industries, time-honored relationships have developed that are often oversimplified, but are generally accepted in the industry. Although it is difficult to argue with such estimates, this must be done using other methods.

Loan security method

It is used only as a method for calculating the amount of a loan that can be raised for the further development of the company after its purchase. Each firm's asset is valued separately, and the amount is multiplied by the average by which the banking industry multiplies the value of the asset when accepting it as collateral.

To summarize what has been said, let us formulate a hypothesis: “Each project can have a different impact on the value of the company, and it corresponds to risk dynamics and profitability dynamics that are optimal in terms of time and amount of financing.” Even 15 years ago, attempts to find these dynamic relationships were quickly hampered by the need for huge calculations, although discounted cash flow techniques and parameter variations have existed for many decades.

Nowadays, for most conventional economic projects, this obstacle has been almost eliminated by powerful calculation spreadsheets such as MS Excel. The role of risk management here is to help managers find the most sustainable and risk-balanced option for investing in projects and help them stay on it during its implementation. In this sense, risk management is an additional internal source of financing for both current operations and growth of the company.

This is where the border of business risks lies. In business, risks are primarily studied from a financial point of view, but this does not mean that there are no non-financial risks in business. They are. It is hardly possible to adequately assess and fully remediately finance, for example, the moral and ethical risks of business activity. Business is just one of the spheres of human activity. It is described through a universal commodity and measuring instrument - money. Life is richer than business, and risk is inherent in life in general.

Federal State Budgetary Educational Institution

higher professional education

Tula State University

Department of Finance and Management

Test coursework on the topic:

Factors influencing business value

Tula 2013

Introduction………………………………………………………………………………….3

1. Determining the value of a business……………………………………………………4
2. Factors influencing the value of a business………………………………7
1. External factors affecting the value of a business…………….7
2. Internal factors influencing the value of a business………...10

Conclusion……………………………………………………………………...12

References……………………………………………………………………13

Introduction

Determining the value of any business is based on a detailed analysis of its financial efficiency and attractiveness. Business owners and management must have a clear understanding of the value of their business before an offer is made to investors.
The value of a business, or rather its growth potential, is a determining factor influencing the financing decision-making process.
Ensuring the growth of the value of invested capital is the most important goal of enterprise management, which, in principle, corresponds to modern trends in corporate governance.

When determining the value of a business, the appraiser analyzes various micro- and macroeconomic factors influencing it. Macroeconomic indicators characterize the investment climate in the country and contain information about whether and how changes in the macroeconomic situation will affect the activities of the enterprise. Macroeconomic risk factors constitute systematic risk arising from external events and cannot be eliminated by diversification within the national economy. The cost of an enterprise operating in a high-risk environment is lower than the cost of a similar enterprise whose operation involves less risk. Typically, higher income comes with a greater degree of risk.

1. Determining business value

Today, in the context of intensification of all kinds of business processes, an objective assessment of the value of a business is of particular importance. Due to the fact that each business is individual, its cost can vary significantly depending on the current situation. The value of a business is an objective indicator of its functioning. Accordingly, assessing the value of a business implies an organizational, financial and technological analysis of current activities, as well as identifying the prospects of the assessed object. Assessing the value of a business is primarily important for those who plan to purchase or sell an established business. However, determining the value of a business is also necessary for calculating the collateral value of the company’s shares, competently drawing up a business plan, making investment decisions, and also determining the effectiveness of management decisions.

In the process of establishing the value of a business, first of all, the value of the company’s tangible and intangible assets is determined: real estate, warehouse stocks, machinery and equipment, financial investments, etc. Next, the company’s performance is assessed, including past, present and future income. In addition, forecasts are made regarding development prospects, and the competitive environment in this market segment is analyzed. After this, a mandatory comparison of the assessed object with similar companies is carried out. As a result of a comprehensive analysis, the real value of the business as an object that can generate profit is determined.

As a rule, specialists use three main approaches to evaluate a business: cost, income and comparative.

The first approach involves assessing the value of a business based on the sum of all its assets at residual value. It turns out that the cost approach is based on the usual motivation and opinion of the buyer, who will not pay more for the enterprise than its tangible and intangible assets are worth.

The second approach is based on calculating the estimated income that the company can bring in the future. We can say that this approach is based on forecasts of the size of the company's future income.

The third approach involves assessing the value of a ready-made business “by analogy.” This approach is based on establishing the value of the company taking into account market opinion. The comparative approach can be used only when there is access to comprehensive financial information on the object being assessed, as well as similar enterprises that are analyzed during the assessment process. In our country, information about the value of sold companies that have become the property of private investors is usually confidential. From the media, periodicals, and Internet resources, you can find out the value of enterprises that are for sale. However, one should take into account the fact that business owners tend to set too high prices for their companies, sometimes they exceed the actual cost by two to three times. Such discrepancies in estimates may be due to the lack of reliable information about the state of the market, or the need to urgently sell the business and other reasons. There can be many reasons. All this makes it very difficult to assess the value of a business using a comparative approach. If there are no objects for comparison, then the cost cannot be determined in this way.

As a rule, in the process of assessing the value of an existing business, a combination of all three approaches is used. The fact is that in order to obtain the most objective result, it is necessary to conduct a comprehensive, comprehensive study of the company, which is based on the simultaneous application of cost, income and comparative approaches to valuation, thanks to which it will be possible to determine the weighted average value of the results for each approach. It should be noted that assessment procedures and assessment results for each individual approach may differ significantly, depending on the goals and objectives. For example, if the value of a bankrupt company is being assessed, the valuation weight established through the income approach will be minimal, but the cost approach will have the greatest weight. In the event that we are talking about assessing the value of a stake in a company that has been listed on the stock exchange for a long period, the comparative approach will have the greatest weight.

1. Factors influencing business value

The value of the object being appraised is influenced by a variety of factors in the external and internal environment, which the appraiser takes into account when determining the value of objects.

The economic characteristics of the industry and market potential, the structure and competitive environment, the main driving forces leading to changes in the industry, the key factors ensuring the success of leaders are analyzed, and development trends in the future are assessed. The age and condition of the assets owned by the enterprise are assessed. Also taken into account are indicators characterizing the strategic position of the enterprise in the industry and its position in competition.

1. External factors affecting business value

External factors include:

• Economic
• Social
• Political

Economic forces:

1. Demand.

Demand is determined by consumer preferences, which depend on what kind of income this business brings to the owner, at what time, what risks it entails, what are the possibilities of control and resale of this business.

1. Income (profit) of the property being assessed from operation and resale.

The income that the owner of an object can receive depends on the nature of the operating activity and the ability to make a profit from the sale of the object after use. Operating profit, in turn, is determined by the ratio of income streams and expenses.

1. Duration of receipt of income.

The time of receipt of income is of great importance for the formation of the value of a business (enterprise). It is one thing if the owner acquires assets and quickly begins to make a profit from their use, and another thing if investment and return of capital are separated by a significant period of time.

1. Risk associated with the object.

The value is inevitably affected by risk as the probability of receiving expected future income.

1. The degree of control over the object (the presence of property rights).
2. One of the most important factors affecting value is the amount of control the new owner has.

If an enterprise is purchased as an individual private property or if a controlling stake is acquired, then the new owner receives such significant rights as the right to appoint managers, determine the amount of their remuneration, influence the strategy and tactics of the enterprise, sell or buy its assets; restructure and even liquidate the enterprise; make decisions on the takeover of other enterprises; determine the amount of dividends, etc. Because more rights are being purchased, the cost and price will generally be higher than in the case of a minority interest purchase.

1. The degree of liquidity of the valuation object.

One of the most important factors influencing the valuation of an enterprise and its property is the degree of liquidity of this property. The market is willing to pay a premium for assets that can be quickly converted into cash with minimal risk of losing some of their value. Hence, the cost of closed joint stock companies should be lower than the cost of similar open companies.

1. Restrictions imposed by the government or others on a property. Enterprise value reacts to any constraints the business has. For example, if the state limits prices for an enterprise’s products, then the cost of such a business will be lower than if there were no restrictions.
2. The relationship between supply and demand for similar objects.

The demand for an enterprise, along with its utility, also depends on the solvency of potential investors, the value of money, and the ability to attract additional capital to the financial market. An important factor influencing the demand and value of a business is the availability of alternative investment opportunities. Demand depends not only on economic factors. Social and political factors are also important, such as attitudes towards business in society and political stability. Supply prices are primarily determined by the costs of creating similar enterprises in society. The number of properties for sale also affects income.

The choice of solution for both the buyer and the seller depends on the development prospects of the given business. Typically, the value of an enterprise in a pre-bankruptcy state is lower than the value of a financially stable enterprise with similar assets. The estimated value of any property is affected by the relationship between supply and demand. If demand exceeds supply, then buyers are willing to pay the maximum price. The upper limit of the demand price is determined by the current value of future profits that the owner can receive from owning this enterprise. This is especially true for an industry in which supply is limited by natural resources. It follows that if demand exceeds supply, prices for raw materials enterprises are closest to the maximum limit. At the same time, if demand exceeds supply, new enterprises may appear in some industries. In the long term, prices for these enterprises may fall slightly. If supply exceeds demand, then prices are dictated by the manufacturer. The minimum price at which he can sell his business is determined by the costs of creating it.

Social factors:

1. Availability and development of infrastructure;
2. Demographic situation, etc.

Political factors:

1. The state of legislation in the field of valuation, property, taxation, etc.;
2. Political and legal situation in the country.

Experience has shown that in modern conditions, when determining the value of companies, it is necessary to take into account not only the above factors, but also be guided by newer tools that take into account those factors that affect the final value of the business. Today, an increasingly important role in management is given to assessing the impact on the cost of quality factors, primarily personnel, information technology and management systems. This impact cannot be assessed using standard tools, and neglecting it in modern conditions threatens a significant loss of effectiveness.

1. Internal factors affecting business value

Internal factors include:

• production, such as production space and production capacity, labor productivity, availability of qualified labor, production losses, etc.;
• technological factors, i.e. introduction and use of new technologies and innovations, support for R&D and use of their results, etc.;
• commercial - the presence of a sales market, competition, competitive advantages of the company being evaluated, the solvency of consumers, etc.;
• investment - creditworthiness and solvency of the company being assessed, investment opportunities, etc.;
• financial, i.e. the financial stability of the company being assessed, the turnover of its inventories, accounts payable and receivable, the liquidity and profitability of the company, the presence of a risk of bankruptcy, as well as the solvency of the company, also noted as an investment factor.