At income approach The value of a business is determined based on the income that the owner may receive in the future, including proceeds from the sale of property not needed to generate those income. This “extra” property is called excess or non-performing assets.

The income approach is the main one for assessing the market value of existing enterprises, which, after their resale to new owners, are not planned to be closed.

The higher the income generated by the property being assessed, the greater its market value. In this case, the duration of the period of obtaining possible income, the degree and type of risks accompanying the process of obtaining income are of great importance.

Usually this means net income(Income Expenses).

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Revenue measurement

Projected business income can be taken into account as:

• accounting profits (losses)
• cash flows

Income expressed in terms of cash flows allows you to more accurately predict future income and estimate the value of the enterprise. This measurement of income is called financial or investment, as opposed to accounting.

One of the main reasons for preferring the financial measurement of income is significant distortions in the accounting calculation of profits due to the ability to carry out accelerated and slow depreciation of fixed assets, and take into account the cost of purchased resources in the cost of production using LIFO and FIFO methods.

Income Approach Cost Estimation Methods

The income approach uses two methods:

• . Based on forecasting flows from of this business, which are then discounted at a rate that matches the investor's required rate of return.
• Capitalization method. The essence of the capitalization method is to determine the average annual income and capitalization rate, on the basis of which the market value of the company is calculated.

The discounted cash flow method is used to calculate the cost at the initial (forecast) stage. At this stage, it is assumed that the income of the business being valued is unstable and may change for various reasons, for example:

• Implementation of investment projects at the enterprise. In this case, there may be a decrease in income with a subsequent increase due to the introduction of new production lines, or a monotonous (without decrease) increase in income if the implementation of the investment project does not lead to a reduction in existing production.
• Revenue growth due to more effective use available capacities.

The capitalization method is used to calculate the value of the business being valued in the post-forecast period, when income is constant or observed steady growth income at a constant rate.

The total assessment of business value is obtained by adding the value in the forecast period and the value in the post-forecast period. After this, a number of adjustments are taken into account.

Finally, within the framework of the income approach, the value of the business being valued is determined as follows:

Business cost =

Application of other approaches to business valuation

Along with income approach to evaluate a business, it can be useful to use and. In some cases, cost or comparative approaches may be more accurate or more effective. In addition, each of the three approaches can be used to validate the cost estimates obtained by the other approaches.

When assessing an organization from the perspective income approach the organization itself is not seen as Property Complex, but as a business, a business that can make a profit. Valuation of an organization's business using the income approach is the determination of the current value of future income that will arise as a result of the use of the organization and (or) its possible further sale. Thus, valuation from the perspective of the income approach largely depends on what the business prospects of the organization being valued are. When determining the market value of an organization's business, only that part of its capital is taken into account that can generate income in one form or another in the future. At the same time, it is very important to know at what stage of business development the owner will begin to receive income and what risk this is associated with.

The greatest difficulty in assessing the business of a particular organization from the perspective of the income approach is the process of forecasting income and determining the discount rate (capitalization) of future income. The advantage of the income approach when valuing a business is that the prospects and future conditions of the organization’s activities are taken into account (pricing for goods, future capital investments, market conditions in which the organization operates, etc.).

The income approach is represented by two main valuation methods - the discounted cash flow method and the profit capitalization method (see Fig. 12.1).

Estimating the value of an organization's business using the method discounted cash flows (Discounted Cash Flow, DCF)(DCF) is most widely used within the income approach. This method is based on the assumption that a potential buyer will not pay more for the organization than the present value of the organization's future business income, and the owner will not sell his business for less than the present value of the projected future income. As a result of the interaction, the parties will come to an agreement on a price equal to the present value of the organization's future income.

Assessment of an organization using the DCF method consists of the following stages:

• - choice of cash flow model;
• - determination of the duration of the forecast period;
• - retrospective analysis of sales volume and its forecast;
• - cost forecast and analysis;
• - forecast and analysis of investments;
• - calculation of cash flow for each forecast year;
• - determination of the discount rate;
• - calculation of the value in the post-forecast period;
• - calculation of the current values ​​of future cash flows and their value in the post-forecast period;
• - making final amendments.

The choice of cash flow model depends on whether there is a need to distinguish between equity and debt capital. The difference is that interest on servicing borrowed capital can be allocated as an expense (in the cash flow model for equity capital) or taken into account as part of the income stream (in the model for all invested capital). The amount of net profit changes accordingly.

Duration of the forecast period in developed countries market economy is usually five to ten years, and in countries with economies in transition, in conditions of instability, it is permissible to reduce the forecast period to three to five years. As a rule, the period up to the organization’s stable growth rate is taken as the forecast period, and it is also assumed that in the post-forecast period there is a stable growth rate.

Retrospective analysis and forecast of sales volume requires consideration and consideration of a number of factors, the main ones being production volumes and prices of goods, demand, growth rates, inflation rates, investment prospects, the situation in the industry, the organization's market share and the general situation in the economy. The sales forecast must be logically consistent with the organization's historical business performance.

At the stage of forecasting and analysis of expenses, it is necessary to study the structure of the organization’s expenses, in particular the ratio of fixed and variable costs, assess inflation expectations, exclude one-time items of expenses that will not occur in the future, determine depreciation charges, calculate the cost of paying interest on loans, compare projected expenses with the corresponding indicators of competitors or the industry average.

Investment forecast and analysis includes three main components: own working capital- “working capital”, capital investments, financing needs.

Calculation of cash flow for each forecast year can be performed by two methods - indirect and direct. Indirect method aimed at motion analysis Money by areas of activity. Direct method is based on an analysis of cash flows by items of income and expense, i.e. according to accounting accounts.

Determining the discount rate (the percentage rate for converting future earnings into present value) depends on what type of cash flow is used as the basis. For cash flow from equity, a discount rate is applied, determined by the owner as the rate of return on equity. For the cash flow from all invested capital, a discount rate is applied equal to the sum of the weighted rates of return on equity and borrowed funds, where the weights are the shares of borrowed and borrowed funds. own funds in the capital structure.

For equity cash flow, the most common methods for determining the discount rate are the cumulative method and the capital asset pricing model. For cash flow from total invested capital, the weighted average cost of capital model is usually used.

When determining the discount rate using the cumulative method, the calculation base is taken as the rate of return on risk-free securities, to which is added additional income associated with the risk of investing in this type valuable papers. Then adjustments are made (increasing or decreasing) to the effect of quantitative and qualitative risk factors associated with the specifics of a given company.

According to the capital asset valuation model (Capital Assets Pricing Model, CAPM) discount rate is determined by the formula

Where R- the rate of return on equity capital required by the investor;

Rf- risk-free rate of return;

R m- the total return of the market as a whole (the average market portfolio of securities);

P - beta coefficient (a measure of systematic risk associated with macroeconomic and political processes occurring in the country);

• 51 - bonus for small organizations;
• 52 - premium for risk specific to an individual company;

WITH- country risk.

According to the weighted average cost of capital model, the discount rate ( Weighted Average Cost of Capital (WACC) is defined as follows:

Where kd- cost of borrowed capital;

tc- income tax rate;

wd- share of borrowed capital in the organization’s capital structure;

kp- cost of raising share capital (preferred shares);

wp- share of preferred shares in the organization's capital structure;

ks- cost of raising share capital (ordinary shares);

ws- the share of ordinary shares in the capital structure of the organization.

The calculation of the value in the post-forecast period is made depending on the prospects for business development in the post-forecast period, and the following methods are used:

• - calculation method according to salvage value(if bankruptcy of the company with subsequent sale of assets is expected in the post-forecast period);
• - cost calculation method net assets(For stable business with significant material assets);
• - the estimated sale method (recalculation of the projected cash flow from the sale into the current value);
• - Gordon's method (income of the first post-forecast year is capitalized into cost indicators using a capitalization coefficient calculated as the difference between the discount rate and long-term growth rates).

Calculation of the current values ​​of future cash flows and the value in the post-forecast period is made by summing the current values ​​of the income that the object will bring in the forecast period, and the current value of the object in the post-forecast period.

The introduction of final amendments is associated with the presence of non-functional assets that do not participate in generating income and their impact on the actual value of equity working capital. When valuing a non-controlling interest, an allowance must be made for the lack of control.

The discounted future cash flow method is applicable to income-generating organizations with a specific history economic activity, with unstable income and expense streams. This method is less applicable to assessing the business of organizations suffering systematic losses. Some caution should also be exercised in applying this method when evaluating the business of new organizations, since the lack of a profit retrospective makes it difficult to objectively predict future cash flows.

The use of the discounted cash flow method is a very complex and time-consuming process, but throughout the world it is recognized as the most theoretically justified. In countries with developed market economies, this method is used in 80-90% of cases when assessing large and medium-sized organizations. Its main advantage is that it takes into account the development prospects of the market in general and the organization in particular, which is most in line with the interests of investors.

Profit capitalization method lies in the fact that the estimated business value of an operating organization is considered equal to the ratio of net profit to the selected capitalization rate:

Where V- business value;

I- amount of profit;

R- capitalization rate.

The earnings capitalization method is typically used when there is sufficient data to determine current cash flow and the expected growth rate is moderate or predictable. This method is most applicable to organizations that generate stable profits, the amount of which varies slightly from year to year or its growth rate is constant. The profit capitalization method in Russia is used quite rarely and mainly for small organizations, since for most large and medium-sized organizations there are significant fluctuations in profits and cash flows from year to year.

The process of business valuation using the profit capitalization method includes the following steps:

• - analysis of the organization’s financial statements;
• - determination of the amount of profit that will be capitalized;
• - calculation of the capitalization rate;
• - determination of the preliminary value of the organization’s business;
• - making final amendments.

The analysis of the organization's financial statements is carried out on the basis of the balance sheet and financial statements. financial results. It is necessary to normalize them, make adjustments for one-time and emergency items that were not regular in the past activities of the organization and the likelihood of their recurrence in the future is minimal. In addition, there may be a need for transformation financial statements in accordance with Generally Accepted Standards accounting (Generally Accepted Accounting Principles, GAAP).

When determining the amount of profit that will be capitalized, the time period for which the profit is calculated is selected:

• - profit of the last reporting year;
• - profit of the first forecast year;
• - average profit for the last three to five years.

The most part used is the profit of the last reporting period

The capitalization rate is usually calculated based on the discount rate by subtracting the expected average annual growth rate of earnings. To determine the discount rate, the methods most often used are those already described when considering the discounted cash flow method: the capital asset valuation model, the cumulative construction model and the weighted average cost of capital model.

If necessary, final adjustments are made for non-functional assets, lack of liquidity, as well as for a controlling or non-controlling stake in the shares or interests being valued.

Assessments of any asset: comparative (direct market comparison approach), income approach and cost approach (see Diagram No. 1).

Diagram No. 1. Approaches to assessing the value of a company.

In Russia, appraisal activities are regulated by the Law on Appraisal Activities and the Federal Valuation Standards (FSO).

Each approach has evaluation methods. So the income approach is based on 2 methods: the capitalization method and the discounted cash flow method. The comparative approach consists of 3 methods: the capital market method, the transaction method and the industry coefficients method. The cost approach is based on 2 methods: the net asset method and the liquidation value method.

Income approach.

The income approach is a set of methods for estimating the value of the valuation object, based on determining the expected income from the use of the valuation object (clause 13 of the FSO No. 1).

In the income approach, the value of a company is determined based on expected future income and discounting it to the current value that the company being valued can bring.

Present value theory was first formulated by Martin de Azpilcueta, a representative of the Salamanca school, and is one of the key principles of modern financial theory.

The discounted dividend model is fundamental to the discounted cash flow model. The discounted dividend model was first proposed by John Williams after the 1930s crisis in the United States.

The DDM formula looks like this:

Where
Price – share price
Div – dividends
R – discount rate
g – dividend growth rate

However, at the moment it is very rare to use dividend payments to estimate the fair value of share capital. Why? Because if you use dividend payments to estimate the fair value of equity, almost all stocks on stock markets around the world will appear overvalued for very simple reasons:

Thus, the DDM model is used more these days to assess the fundamental value of a company's preferred shares.

Stephen Ryan, Robert Hertz and others in their article say that the DCF model has become the most widespread, as it has a direct connection with the theory of Modelliani and Miller, since free cash flow is a cash flow that is available to all holders of the company's capital, as holders debts and shareholders. Thus, with the help of DCF, both the company and the share capital can be valued. Next we'll show you what the difference is.

The formula of the DCF model is identical to formula No. 2, the only thing is that free cash flow is used instead of dividends.

Where
FCF – free cash flow.

Since we have moved on to the DCF model, let's take a closer look at the concept of cash flow. In our opinion, the most interesting classification of cash flows for valuation purposes is given by A. Damodaran.

Damodaran identifies 2 types of free cash flows that must be discounted to determine the value of the company:

In order to move further, we already need to show the difference in the value of the company and the value of share capital. A company operates on invested capital, and invested capital may include either equity or varying proportions of equity and debt. Thus, using FCFF, we determine the fundamental value of invested capital. In the literature on English language You can come across the concept of Enterprise value or the abbreviation EV. That is, the value of the company taking into account debt capital.

Formulas No. 4, No. 5 and No. 6 present calculations of free cash flows.

Where EBIT is earnings before interest and income tax;

DA – depreciation;

Investments - investments.

Sometimes in the literature you can find another formula for FCFF, for example, James English uses formula No. 5, which is identical to formula No. 4.

Where
CFO – cash flow from operational activities(cash provided by operating activities);
Interest expense – interest expenses;
T – income tax rate;
CFI - cash flow from investment activities(cash provided by investing activities).

Where
Net income – net profit;
DA – depreciation;
∆WCR – changes in required working capital;
Investments – investments;
Net borrowing is the difference between received and repaid loans/loans

Formula 7 shows how the value of equity capital can be derived from the value of the company.

Where
EV – company value;
Debt – debts;
Cash – cash equivalents and short-term investments.

It turns out that there are 2 types of DCF cash flow valuations depending on the cash flows. Formula No. 8 contains a model for valuing a company taking into account debt, and formula No. 9 contains a model for valuing share capital. To estimate the fundamental value of a company or equity, you can use both formula No. 8 and formula No. 9 together with formula No. 7.

Below are two-stage valuation models:

Where
WACC – weighted average cost of capital

g – growth rate of cash flows that persists indefinitely

As you can see, in equations No. 11 and No. 12, instead of the abstract discount rate R, WACC (weighted average cost of capital) and Re (cost of equity capital) appeared, and this is not accidental. As Damodaran writes, “the discount rate is a function of the risk of expected cash flows.” Since the risks of shareholders and the risks of creditors are different, it is necessary to take this into account in valuation models through the discount rate. Next we will return to WACC and Re and look at them in more detail.

The problem with the two-stage model is that it assumes that after a phase of rapid growth there is an immediate stabilization and then incomes grow slowly. Despite the fact that, according to the author’s observations, in practice most analysts use two-stage models, it is more correct to use a three-stage model. The three-stage model adds a transition stage from rapid growth to stable income growth.

Damodaran in one of his educational materials shows very well graphically the difference between two- and three-stage models (see Figure No. 1).

Figure No. 1. Two- and three-stage models.
Source: Aswath Damodaran, Closure in Valuation: Estimating Terminal Value. Presentation, slide #17.

Below are three-stage models for estimating company value and equity:

Where
n1 – end of the initial period of rapid growth
n2 – end of the transition period

Let's go back to the discount rate. As we wrote above, for discounting purposes in valuing a company or share capital, WACC (weighted average cost of capital) and Re (cost of equity capital) are used.

The concept of weighted average cost of capital WACC was first proposed by Modeliani and Miller in the form of a formula that looks like this:

Where
Re – cost of equity capital
Rd – cost of borrowed capital
E – value of equity
D – value of borrowed capital
T – income tax rate

We have already said that the discount rate shows the risk of expected cash flows, so in order to understand the risks associated with the company's cash flows (FCFF), it is necessary to determine the capital structure of the organization, that is, what share of equity in invested capital and what share borrows capital from inverted capital.

If a public company is being analyzed, then it is necessary to take into account market values ​​of equity capital and debt capital. For non-public companies it is possible to use balance sheet values ​​of equity and debt capital.

Once the capital structure has been determined, it is necessary to determine the cost of equity capital and the cost of debt capital. There are many methods for determining the cost of equity (Re), but the most commonly used model is the CAPM (capital asset pricing model), which is based on the Markowitz portfolio theory. The model was proposed, independently, by Sharpe and Lintner. (see Formula No. 16).

Where
Rf – risk-free rate of return
b – beta coefficient
ERP - equity risk premium

The CAPM model states that an investor's expected return is made up of two components: the risk-free rate of return (Rf) and the equity risk premium (ERP). The risk premium itself is adjusted to the systematic risk of the asset. Systematic risk is indicated by beta (b). Thus, if the beta coefficient is greater than 1, it means that the asset appears to be riskier than the market, and thus the investor's expected return will be higher. Well, if the beta coefficient is less than 1, this means that the asset appears less risky than the market and thus the investor’s expected return will be lower.

Determining the cost of borrowed capital (Rd) does not seem to be a problem; if the company has bonds, their current yield can be a good guide at what rate the company can attract borrowed capital.

However, as is known, companies are not always financed through financial markets, so A. Damodaran proposed a method that allows a more accurate determination of the current cost of borrowed capital. This method is often called synthetic. Below is the formula for determining the cost of borrowed capital using the synthetic method:

Where
COD – cost of borrowed capital
Company default spread – company default spread.

The synthetic method is based on the following logic. The company's coverage ratio is determined and compared to publicly traded companies and the default spread (the difference between the current bond yield and the government bond yield) of comparable companies is determined. Next, the Berzisk rate of return is taken and the found spread is added.

To value a company using free cash flows to equity (FCFE), the discount rate is the cost of equity (Re).

So we described theoretical approach estimating the value of a company based on cash flows. As you can see, the company's value depends on future free cash flows, discount rates and post-forecast growth rates.

Comparative approach

The comparative approach is a set of methods for assessing the value of a valuation object, based on a comparison of the valuation object with objects that are analogues of the valuation object, for which information on prices is available. An object - an analogue of the valuation object for valuation purposes is recognized as an object that is similar to the valuation object in the main economic, material, technical and other characteristics that determine its value (clause 14, FSO No. 1).

A company's assessment based on a comparative approach is carried out using the following algorithm:

1. Collection of information about sold companies or their shareholdings;
2. Selection of analogue companies according to the following criteria:
   • Industry similarities
   • Similar products
   • Company size
   • Growth prospects
   • Quality of management
3. Carrying out financial analysis and comparison of the company being valued and analogue companies in order to identify the closest analogues of the company being valued;
4. Selection and calculation of cost (price) multipliers;
5. Formation of the final value.

The value multiplier is a coefficient showing the ratio of the value of invested capital (EV) or share capital (P) to the financial or non-financial indicator of the company.

The most common multipliers are:

• P/E (market capitalization to net income)
• EV/Sales (company value to company revenue)
• EV/EBITDA (company value to EBITDA)
• P/B (market capitalization to book value of equity).

In the comparative approach, it is customary to distinguish three assessment methods:

• Capital market method;
• Transaction method;
• Method of industry coefficients.

The capital market method relies on the use of peer companies from the stock market. The advantage of the method is the use of factual information. What is important is that this method allows you to find prices for comparable companies on almost any day, due to the fact that securities are traded almost every day. However, it must be emphasized that using this method we estimate the value of a business at the level of a non-controlling stake, since controlling stakes are not sold on the stock market.

The transaction method is a special case of the capital market method. The main difference from the capital market method is that in this method the level of value of the controlling stake is determined, since analogue companies are selected from the market for corporate control.

The industry ratio method is based on recommended relationships between price and certain financial indicators. The calculation of industry coefficients is based on statistical data over a long period. Due to the lack of sufficient data, this method is practically not used in the Russian Federation.

As mentioned above, the capital market method determines the value of a freely tradable minority interest. Therefore, if the appraiser needs to obtain value at the level of a controlling stake and information is available only for public companies, then it is necessary to add a control premium to the value calculated by the capital market method. Conversely, to determine the value of a minority interest, the non-controlling interest discount must be subtracted from the value of the controlling interest found using the transaction method.

Cost-effective approach

The cost approach is a set of methods for estimating the value of an appraised object, based on determining the costs necessary to reproduce or replace the appraised object, taking into account wear and tear and obsolescence. The costs of reproducing the valuation object are the costs necessary to create an exact copy of the valuation object using the materials and technologies used to create the valuation object. The costs of replacing the valuation object are the costs necessary to create a similar object using materials and technologies used at the valuation date (clause 15, FSO No. 1).

I would like to immediately note that the value of an enterprise based on the liquidation value method does not correspond to the liquidation value. The liquidation value of the valuation object based on paragraph 9 of FSO No. 2 reflects the most likely price at which this valuation object can be alienated during the exposure period of the valuation object, which is less than the typical exposure period for market conditions, in conditions where the seller is forced to make a transaction for the alienation of property. When determining the liquidation value, in contrast to determining the market value, the influence of extraordinary circumstances forcing the seller to sell the property under valuation on conditions that do not correspond to market conditions is taken into account.

Used Books

1. Lintner, John. (1965), Security Prices, Risk and Maximum Gains from Diversification, Journal of Finance, December 1965, 20(4), pp. 587-615.
2. M. J. Gordon, Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics
3. Marjorie Grice-Hutchinson,
4. Sharpe, William F. (1964), Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, The Journal of Finance, Vol. 19, No. 3 (Sep., 1964), pp. 425-442.
5. Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Lauren A. Maines; Krishna Palepu; Katherine Schipper; Catherine M. Schrand; Douglas J. Skinner; Linda Vincent, American Accounting Association's Financial Accounting Standards Committee Response to FASB Request to Comment on Goodwill Impairment Testing using the Residual Income Valuation Model. The Financial Accounting Standards Committee of the American Accounting Association, 2000.,
6. Vol. 41, No. 2, Part 1 (May, 1959), pp. 99-105 (article consists of 7 pages)
7. I.V. Kosorukova, S.A. Sekachev, M.A. Shuklina, Valuation of securities and business. MFPA, 2011.
8. Kosorukova I.V. Lecture notes. Business valuation. IFRU, 2012.
9. Richard Braley, Stuart Myers, Principles of Corporate Finance. Library "Troika Dialogue". Olympus Business Publishing House, 2007.
10. William F. Sharp, Gordon J. Alexander, Jeffrey W. Bailey, Investments. Publishing house Infra-M, Moscow, 2009.

Proposed New International Valuation Standards. Exposure Draft. International Valuation Standard Council, 2010.

Marjorie Grice-Hutchinson, The School of Salamanca Reading in Spanish Monetary Theory 1544-1605. Oxford University Press, 1952.

John Burr Williams, the Theory of Investment Value. Harvard University Press 1938; 1997 reprint, Fraser Publishing.

Apple company capitalization as of 4/11/2011.

Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Lauren A. Maines; Krishna Palepu; Katherine Schipper; Catherine M. Schrand; Douglas J. Skinner; Linda Vincent, American Accounting Association's Financial Accounting Standards Committee Response to FASB Request to Comment on Goodwill Impairment Testing using the Residual Income Valuation Model. The Financial Accounting Standards Committee of the American Accounting Association, 2000.

Aswath Damodaran, Investment Valuation. Tools and methods for assessing any assets. Alpina Publisher, 2010

Damodaran uses the term firm in his work, which is identical to our term company.

James English, Applied Equity Analysis. Stock Valuation Techniques for Wall Street Professionals. McGraw-Hill, 2001.

If the company has a minority interest, then the minority interest must also be subtracted from the value of the company to obtain the value of share capital.

Z. Christopher Mercer and Travis W. Harms, under scientific editors V.M. Rutthauser, Integrated Business Valuation Theory. Maroseyka Publishing House, 2008.

M. J. Gordon, Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics Vol. 41, No. 2, Part 1 (May, 1959), pp. 99-105 (article consists of 7 pages)

Z. Christopher Mercer and Travis W. Harms, scientifically edited by V.M. Rutthauser, Integrated Business Valuation Theory. Maroseyka Publishing House, 2008.

Modigliani F., Miller M. H. The cost of capital, corporation finance and the theory of investment. American Economic Review, Vol. 48, pp. 261-297, 1958.

Business valuation using any of the known methods is characterized by a high degree of subjectivity. However, the level of subjectivity and, accordingly, the accuracy of the calculation results are not the same in relation to different objects of assessment. Thus, when assessing real estate, machinery and production equipment, it is possible to ensure a fairly high degree of reliability of the calculation results. To do this, you can use such well-developed and widely used approaches to cost estimation as: calculation of the amount of costs incurred, capitalization of profits and market comparative analysis.

As a rule, the appraiser almost always has at his disposal the necessary initial data on previous sales of comparable real estate on the market. For example, when assessing land plot allocated for the location of an enterprise, it is likely to find a number of areas with a similar profile of use, for which a comparative analysis can be carried out based on a comparison of areas or the length of the front boundary. The property being appraised is a tangible object.

On the contrary, the assessment of any operating enterprise, as noted above, is subjective. As for closed companies for which there is no express open market shares, then in this case the problem of a reasonable valuation becomes even more difficult. Although detailed methods exist for valuing such businesses, they are not as well known or as widely accepted as the methods used for valuing real estate and industrial equipment. The valuation process for closely held companies whose shares are not listed on the stock market is based more on the subjective opinion of the appraiser than similar procedures used in real estate valuation.

In addition, although there may be a large number of sales of similar companies, factors influencing sales prices, measured using quantitative estimates much more difficult than in the case of comparing real estate sales. The effectiveness of the functioning of a particular enterprise depends to a fairly large extent on the professionalism of the managers working there, personal factors and many other intangible components. These factors are usually more difficult to account for than those that affect the value of real or personal property.

The financial strength of the company, the quality of management, the ability to change activities, intangible assets such as patents and licenses, as well as countless other components - all this largely requires an individual approach. In addition, an analysis of the mutual influence of all these factors is necessary.

As a conclusion, it should be stated that there are no standard methods that could be applied to comparable data and that would guarantee a sufficiently high objectivity of the final assessment. In any case, business assessment will be subjective. The final conclusion about the value of the enterprise must be based on the sequence of judgments that the appraiser makes during the valuation process.

The valuation of large multi-industry companies managed by professional managers represents more complex problem than individual, relatively small-sized companies. When selling individual businesses, standard valuation methods (formulas) that are widely used in market practice are usually used. This is due to the fact that such firms in most cases are small enterprises retail or highly specialized commercial objects. They have a significantly less complex production and management structure. In addition, they are much more numerous than large companies run by professional managers and, accordingly, are much more likely to be sold. Score more large companies, managed by managers, is much less often carried out using standard formulas.

Despite the subjective nature of the business valuation process, there are basic approaches and the corresponding methods within them that have gained recognition among professional appraisers. One such approach is the income approach to business valuation.

According to the American business valuation standard BSV-I, the following fairly successful interpretation of the concept of the income approach is given.

Income approach to business valuation(income approach) is a general way of determining the value of an enterprise or its equity capital, which uses one or more methods based on the recalculation of expected income (American standard BSV-VII). It is assumed that the value of the business is equal to the present value of future income from owning the enterprise.

To implement this method, a forecast is required regarding future cash receipts for a given number of years (forecast and post-forecast periods). The main goal, which can be realized using the income approach, is the need for investors to receive in the future a certain economic benefit (income, profit, dividends) from owning the acquired enterprise (business). To ensure the commensurability of cash flows at different times, the discounting procedure is used. In this case, the level of risk from such ownership must be taken into account, which is one of the components when calculating the discount rate.

The income approach is intended to establish the value of an operating enterprise as a whole or a share of ownership, or a package of securities by calculating the current value of all expected economic benefits. In other words, the income approach is based on the following principle: the value of the business being valued is equal to the current value of all future income from owning this business.

The income approach is quite well developed in theoretical terms. It has the necessary flexibility at the final stage of business valuation. In addition, it makes it relatively easy to combine the calculation of fair market value and investment value using the equity or invested capital model for controlling or non-controlling interests, taking into account the appropriate level of liquidity. It is advisable to use it to assess the value of a company when it generates significant income or profit as a result of its core activities.

When using the income approach, the property of the enterprise that ensures its normal functioning is not taken into account in the process of assessing the value of the business, since if it is sold, income from the business will be impossible.

The income approach is designed to determine the value of a functioning enterprise based on the income that it is capable of generating for its owner in the future, including proceeds from the sale of property (unused assets) that will not be needed to generate these income. Future income (cash flows) are usually calculated taking into account the time factor of their receipt, ensured by performing a discounting procedure at a certain rate (discount rate). The cash flows calculated in this way can subsequently be summed up. The value of unused (excess) assets added to them is taken into account at the level of their market value.

The income approach is considered the most acceptable from the point of view of investor requirements. The fact is that any buyer (investor) seeks to acquire not a set of certain assets (buildings, structures, equipment, intangible assets), but a ready-made, functioning business (with a professional labor collective, a certain reputation, trademarks, brand), which will allow him not only to return the invested funds, but to receive an acceptable net profit in the future. The composition of the main methods usually referred to as the income approach is shown in Fig. 6.1.

The use of the net cash flow discounting method is advisable for estimating the value of objects that generate cash income that is not uniform over the years, but the capitalization method clean flow cash - for objects that bring uniform and approximately equal income.

Rice. 6.1.

The approach under consideration is applicable only to income-generating objects, i.e. those whose purpose of ownership is to generate income (for example, from the production and sale of products, rental of real estate, etc.).

Important characteristics when applying methods as part of the income approach are the volumes of estimated values. Cost may represent test(majority) or uncontrolled(minority) share of the owner in the business (for example, in the form of a purchased block of shares). This circumstance necessitates the need for appropriate adjustments at the final stage of calculations. The procedure for its implementation will be outlined below.

Since the receipts (the income received by the enterprise and the proceeds from the sale of the asset) are distributed over time, in order to determine the value of the enterprise at a certain date, all these cash flows must be reduced to a certain period of time, i.e. discounted.

The process of discounting (usually reduction to the initial period of time) is based on the idea that today's ruble is worth more than tomorrow's ruble. The investor gives up current consumption in order to invest free funds in a business and receive income tomorrow. Discounting determines the amount that needs to be invested in the present in order to receive a certain amount of income in the future.

Business valuation method using discounted cash flows(DCF) is recommended for use when a significant change in future income is expected compared to income received from current operating (production) and other types of activities (for example, investment). The combination of the words “significant change” means a significant increase or decrease in income growth compared to the existing rate. Business valuation according to this method is determined by finding net present value as the sum of discounted cash flows for all forecast periods and capitalized cash flow of the post-forecast (terminal) period.

In addition, this method is recommended for use in enterprises that have a certain history of economic activity (preferably profitable) and are at the stage of growth or stable economic development. At the same time, it is not suitable for estimating the value of enterprises that systematically suffer losses (in Western terminology they receive negative profits), since in such a case there is no subject of discounting (positive cash flow). The inability to obtain historical estimates of revenues or profits makes it difficult, if not impossible, to objectively forecast future cash flows.

The method of discounting future cash income can be used for other purposes, in particular to calculate the cost trademark companies. This may be necessary, for example, when adding a trademark to the authorized capital of a joint venture, as well as when using it as collateral for a loan issued by a commercial bank or financial company. The method of discounting future income has become widespread in foreign practice business valuation.

The main arguments in favor of using the discounted cash flow method are the following:

• practicality and possibility of application for any existing (successfully functioning) enterprise (32%);
• the ability to analyze cash flows over time, as well as taking into account the time factor (20%);
• the ability to use elements of the long-term planning system (15%);
• goal and strategic orientation (11%);
• ability to predict future cash flows
• (P%);
• other (11%).

The income approach includes a group of similar methods for estimating the value of a business, which are associated with discounting various types economic benefits. These are methods of discounting net cash flows and discounting future earnings.

A method for estimating the value of a business based on discounting future cash flows. There is a direct relationship between a company's market value and discounted cash flow. Achievement best value This flow is associated with the need for long-term (systematic) attraction of economically feasible investments (capital) and management of this capital.

The discounted cash flow method can be used to assess the value of a business:

• with positive cash flows randomly changing over time and unevenly arriving;
• if the enterprise is a large single- or multifunctional complex;
• when income and expense flows are seasonal.

Note that the net profit indicator only partially reflects the actual volumes of cash flows, which are usually short-term. This is explained by the fact that the volumes of depreciation charges and financial flows due to the investment of available funds, usually invested in highly efficient investment projects or high-yield financial instruments (for example, securities).

In discounted future cash flow and/or dividend methods, cash flows are calculated for each of several future periods. These receipts are converted into value by applying a discount rate using present value (discounted) value methods. There are several formulations of the concept of “cash flow”. In practice, the concepts used are net cash flow (cash flow that can be distributed to shareholders) or dividends actually paid.

The discount rate must be adequate to the type of expected economic benefits under consideration. For example, pre-tax rates should be used to determine net-of-tax economic benefits, after-tax rates should be used to identify net-of-tax benefit flows, and net cash flow rates should be used to determine net cash flow benefits.

If the projected income is expressed in nominal amounts (ie using current prices), then nominal rates should be used. If projected income is presented in real amounts (taking into account changes in the price level), then rates for real values ​​should be used. Similarly, the expected long-term growth rate of income should be reflected in the documents and expressed in nominal or real terms.

Calculations using the discounted future cash flow method are carried out using the formula

where C p is the value of the enterprise (business);

D, - cash flow in the i-th period of ownership of the property;

/*/ - discount rate for the i-th period (/" =1, ..., l);

Srev - the cost of reversion (i.e., proceeds from the sale of a business for the first year of the post-forecast period);

Greek - recapitalization rate.

Reversion cost determined by Gordon's formula:

where D„ is cash flow for the first year of the post-forecast period;

G - discount rate;

g- the company's long-term earnings growth rate.

In the numerator of the Gordon formula, instead of cash flow, indicators such as next year's dividends and next year's profit may also appear.

The factors most often considered when determining growth rate (g) include the following:

• general economic conditions;
• the expected growth rate of the industry in which the company operates, including consideration of the expected growth rate of the industries in which the company's products are sold;
• synergistic benefits that become achievable through the acquisition process;
• retrospective company growth rates;
• management's expectations regarding the assessment of future business growth taking into account the company's competitiveness, including the most economically feasible changes in technology, product range, target market, pricing, sales and marketing methods.

When assessing the factors listed above, it must be borne in mind that the method of capitalizing the results of one period ( SPCM) and terminal (post-forecast) cost in MPDM(method of discounting the results of several periods) are focused on the use of so-called infinite models. These models are based on the assumption that profits can be made indefinitely.

Example 6.2. It is known that the forecast period is 5 years, and the cash flow of the sixth year is 150 million rubles, discount rate is 24%, long-term growth rate is 2%. Determine the cost of reversion.

Solution

Calculation "G" in the case of cash flow determined for invested capital, is performed according to the formula

where /* c is the discount rate for equity capital;

U s - specific gravity(share) of equity capital;

/з - discount rate of borrowed capital;

At 3 - the share of borrowed capital.

Since businesses are typically financed with both debt and equity, the costs of each must be determined. Debt capital is usually less expensive than equity capital. This is because it tends to remain less risky, and interest costs on obligations (debts) are usually tax deductible. Equity (such as common stock) is riskier than debt. In addition, it is quite difficult to accurately evaluate, since ordinary shares do not have a fixed income, and their market (exchange) value can change significantly over time in the stock market.

A comparative assessment of the characteristics of debt and equity capital is given in Table. 6.3.

The differences in the rights and associated risks of capital providers presented above result in corresponding differences in the costs of each of these sources of capital use.

Calculation of business value can be carried out within two time periods: a certain forecast period and the following post-forecast (terminal) period. For this case, a generalized formula is used:

where C p is the value of the enterprise (business cost);

DP pr - discounted value of cash flow, typical for the forecast period;

DPPpr is the discounted value of cash flow, characteristic of the post-forecast period.

The value received after the completion of a specific projected life of the business is also called extended cost(Dppr) . To determine it, it is recommended to use a simplified formula:

where P h - net operating cost minus adjusted taxes;

WACC- weighted average capital costs.

Comparative characteristics of debt and equity capital*

Table 6.3

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