In the modern world, business appraisal is becoming increasingly important, as it is simply necessary when the board of the company takes any decisions. Any company evaluates the business in order to properly plan and manage financial activities. The use of this type of assessment, as a rule, increases the efficiency of resource use and provides an increase in the level of control and security. An integrated approach to valuation is to establish the market value of a functioning company, that is, the optimal price at which it can be sold in a competitive market. In addition, the valuation of an enterprise’s business may also be relevant to determining the value of the enterprise’s divisions, its fixed assets or equipment used.
When do you need to evaluate a business?
Evaluation of the company's business is necessary when justifying the purchase and sale of the entire business or its share, determining the market value of collateral for a loan, substantiating investments, developing a business plan, the need to justify the tax base, and in other situations.
Any enterprise can become an object of evaluation: a small company, a business combination, a structural unit of one enterprise, a company with a specific legal form, a bank, and an insurance company. Before deciding to evaluate a business, it is necessary to determine the purpose of the assessment. If this is a determination of the real value of a business, an official report is usually not required. Issuing a valuation report increases the cost of the services of valuation firms and private appraisers.
If we talk about the stages, business evaluation has a certain algorithm. First,
information is
collected about the evaluated object. The second step is related to the analysis and study of the market in which a certain enterprise operates. For this, it is usually necessary to use as detailed information as possible about the activities of a similar company. Then, calculations based on suitable approaches and valuation methods follow, after which the results obtained by evaluating the business using different approaches are agreed upon. The last stage is the preparation of a business valuation report. The classical approaches include profitable, comparative and costly.
Valuation of a business using the income approach requires processing information about business income, since the value of the valuation object will depend on this indicator. The higher the business income, the more it costs. Moreover, the appraiser takes into account not only the amount of income, but also the period for which it can be obtained, as well as the risk that accompanies the process of profit.
A comparative approach is applied when evaluating when there are several objects on the market with which you can compare the object of evaluation. The accuracy of determining the optimal business value in this case will depend on the reliability of the data collected about the companies-peers.
The cost approach is used to evaluate an enterprise that does not generate stable income. It can also be a newly created enterprise, or a business that is in the process of liquidation.
It should be noted that all these approaches are closely interconnected, and in an ideal market, evaluating the same business through different approaches will have the same results. However, the market in most cases is imperfect, and most often the use of three approaches leads to three different results.